Here at the WebRidesTV.com Blog, we are known for tackling the tough issues.  Such hot issues include which muscle car rocks the most casbah for the current week, cars made of foam and who could forget the 10 Commandments of ricers?  Well this week, I will be discussing the hot issue of cas prices, and more particularly, why they are so high.  More importantly, will you have to trade in your Escalade for a Prius?

The above picture gives us a good overall idea as to what factors are accountable for the cost of gasoline, but as you may have noticed, the price has increased quite a bit since January - so which one of these factors have changed and why?

Well my children, I cometh to bringist thou the answers.

The figures today show a massive increase in the cost of crude oil and refinement, and any economist would probably tell you that this has much to do with the supply/demand curve.  They would probably be right.  Much of the problem lies within our own growing addiction to oil, as the United States currently consumes 20,730,000 barrels per day (roughly 25% of the world consumption).  However, our consumption growth has been steady for decades and the growth is actually beginning to slow as the cost of gasoline increases.  Even moreso, steady growth has always been easily compensated for, and the large fluctuations in the price of oil in the past have been caused by geopolitics, rather than supply and demand.  Therefore, it has become quite apparent that the latest increase in the demand of oil is coming from somewhere else.

Now I am not going to point fingers…nevermind, I will.  China and India are both rapidly growing economies.  China alone is experiencing a 10% annual GDP increase, and even though working in a cubicle is slightly better than working on a farm, countries of their size are now faced with the problem of getting millions of people to work everyday.  No longer do people live in rural areas, but rather they must drive more and more over greater distances as the cities grow.  This is clearly having an impact on gasoline use, as China is expected to double its need for imported oil between now and 2010. The International Energy Agency predicted that by 2030, Chinese oil imports will equal imports by the U.S. today.

THAT’S AN INCREASE IN CONSUMPTION OF OVER 300%!

Let’s take a look at a graph I made to describe what happens when world production increases too quickly:

The increase in global consumption of crude is something that is completely unavoidable, no matter what your hippie friends may tell you.  The fact of the matter is that oil is our base commodity; the production of all other commodities relies on and reflects the cost of oil.

There is, however, another factor that affects the cost of crude, and that’s called speculation.

These figures all make sense in the long run, but it is becoming increasingly apparent that there is much more behind the cost crude than meets the eye.  With national gas prices breaking the $4.00 mark this month, it’s hard not to think that we’re simply being mugged on the massive scale, and many observers of the market are starting to wonder if the stock market itself has to do with the problem.

In the oil business stocks play a very important roll.  The problem with determining the cost of gasoline is difficult without a stock valuing system due to the fact that demand at the individual gas station doesn’t necessarily affect the greater demand of a region.  Likewise, a gas station’s supply of gasoline has no greater impact on the vast amount of oil that is currently being shipped to the station, refined or pumped from the ground at any given moment.  To better reflect the worldwide oil assets from wellhead to consumer, the stock value of a barrel of oil is used, as it can determine an accurate depiction of the entire industry’s supply of oil.

This is all fine and dandy, but many people are beginning to fear and misunderstand the futures market - which is buying mass quantities of oil, storing it, and then selling it at a later time for a profit.  It has become an increasingly popular idea that the cost of oil is being artificially increased due to stock giants (such as Goldman Sachs and Morgan Stanley) buying up massive supplies of the world’s oil and storing it.  By buying more and more stock, they increase the value of the stock, even though the actual value of oil has not changed.  Needless to say, their actions have raised quite a few eyebrows lately.

Too bad this isn’t the case.

In theory the futures market is susceptible to such exploitation, however, storing oil costs money.  I can understand where people are coming from on this one, but they just aren’t making any sense!  To assume that these firms have the assets to buy up a massive portion of the world oil supply and store it without selling a previous stock is just silly!  Don’t get me wrong, the futures market does affect the cost of oil, but it’s nowhere near what some people would like you to think.

In reality, gasoline costs so much because of all these things, and it will only get worse as world consumption increases, speculators buying more, and the value of your dollar is constantly decreasing due to unchecked inflation.  There are really three outcomes to this, and two of them are utterly stupid from the financial standpoint.

1. We allow inflation to run wild and don’t increase world supply of oil by drilling ANWAR or seeking immediate cheap alternative power supplies.  Oil will eventually cost so much that it will cause the economy to collapse and many people die; wars break out over oil supply (possibly not too bad an outcome if your country has nukes).  Environmentalists everywhere become conscripted.
2. We make a huge initiative to move to electric cars, and the environmentalists are happy - meanwhile people can’t pay their electric bills because electric power is more expensive than gas.  The same economic problem occurs, just as we have now, and the environmentalists are sad again (as god intended).
3. We let the market dictate how we should act, and begin investing in the cheapest form of energy (currently nuclear power) and seamlessly move to electric cars.  Gas prices fall as a result of lowered use.  Environmentalists cry about nuclear power plants (because they don’t know better), but everyone pays cents instead of dollars to get to work each day.  The air would be a lot cleaner, and city streets are unusually silent.

Basically, we should forget oil.  It’s no longer cheaper than electricity, and we have no reason to continue using it.  Let’s just start building nuclear power plants, already!  Actually, I have a hidden agenda - I REALLY want to drive the Volvo C30 ReCharge.