One of my most popular posts has been one entitled, "Why Are Gasoline Prices So High?"
If you want a more comprehensive look at the subject, check out this PowerPoint presentation by Tony Sementelli of Flint Hills Resources. Disclosure: Flint Hills Resources is a gas refiner, but as far as I could tell, all the facts in the presentation are accurate. Take a look and draw your own conclusions.
Here are a couple of highlights:
I’m doubtful about those forecasts. Economic growth is strong, but unlikely to be stronger than in 2006 (though I’ll admit that more of the growth is happening in emerging countries, which are less energy efficient). Also, price impacts on quantity demanded operate with a lag, and we have some energy conservation effects helping reduce demand. But Tony and I agree that this is a key issue.
Looking at the growth of capacity relative to demand suggests some grounds for optimism:
Keep in mind that production comes on line with a long time lag, but the world has been working hard on that issue recently.
As for things I didn’t know before Tony’s presentation, this is the most stunning:
I knew that countries rather than companies were the dominant owner of reserves (think Saudi Arabia, Venezuela, etc.), but I didn’t realize just how little of the world’s oil was in private hands. This is frightening. Fortunately, the nations that control the rest of the oil are not a monolithic bloc, despite OPEC. They may well be acting competitively in some dimensions. But without the pressure of stockholders, they can maintain inefficient practices for years. And have.
Check out the whole presentation.