Will Gas Prices Go Down
94The original hub below was written almost 1 year ago and as you will see, I correctly predicted gas prices would not be going down. New developments may change this, get my latest take and analysis through the link below.
Get my latest take on Gas from this new HUB!
- Will Gas Prices Go Down - New Updates
Get my latest take on where gas is heading here.
When will we see relief at the pumps?
Will gasoline prices go down? Will there ever be cheap gas again? There is no clear answer to these questions but if we look at several factors, we can get some direction on the future price of gas. First things first, to understand where gas is heading, we need to understand how it is priced.
Supply and demand sets the price of gas, right? Well, not really. While this general premise makes sense, gasoline is a highly manipulated commodity that changes price on many factors. A majority of each barrel of oil goes into making gasoline for our cars. While factors such as taxes and refinery costs play a role in the price of gas, let's take a closer look at the factors currently driving up costs:
1. Supply & Demand - right now, demand for oil around the world is relatively strong due to the recovering world economies. Oil traders will generally trade oil higher as the US economy improves. They are speculating that an improved economy will lead to higher consumption. On the supply side, inventories are strong and there is no shortage of oil. Simply put, let's check off Supply & Demand as being a moderate factor right now in the high price of gas.
2. OPEC - OPEC is a collection of 13 countries (mostly middle east countries) that make up about 40% of the world's oil supply. When they simply decide they want to raise the price of oil, they lower their output. In other words, they can create an artificially short supply. In 2008, our economy crashed and oil demand plummeted. Due to a much lower demand, oil prices fell hard. While OPEC fears a repeat of this, they still try balance between maximizing oil prices without hurting the world economies. While OPEC can be a strong factor for high gas, I believe right now they are probably a moderate to a low factor.
3. Political and Social unrest - World events such as the one in Libya can create a rise in Oil. Again, this is usually speculative as the situation in Libya had little effect on the world's oil supply, however, any uncertainty can give traders a reason to drive up the price of oil. This would be another moderate factor.
4. Declining US Dollar - Around the world, the denomination for trading Oil is US dollars. In other words, all markets use the dollar when pricing oil. Due to the fact that the US dollar is losing value, this makes investments in oil 'cheaper' for other countries. Think of it this way, if $1 Canadian dollar can be exchanged for $1 US dollar, there is no advantage. However, if the dollar weakens (and it has been for a long time!), $1 Canadian dollar is now worth $1.10 US dollars. This makes commodities that trade in US dollars more attractive as they get them at a discount. Check off the declining dollar as a relatively strong factor in rising oil.
5. Market Manipulation - I saved this reason for last as I think it is the biggest factor. I plan to do an entire hub on market manipulation. You will have to be a bit skeptical as it is not possible for me to prove 100% that this type of manipulation goes on. However, in my opinion, I think it is clear that the large financial institutions on wall street (you know who they are) work in tandem to drive up the prices. It is sort of like watching sharks feed, they will never feed on each other, but they will feed on their prey (their customers). It is very easy for these firms to take large positions in futures and options contracts for oil, then have their analyst pump up the price ("We think Oil is going to $150 per barrel!). Lastly, they then sell their holdings to their customers exiting the contracts at huge profits and leaving their customers holding on to highly overinflated investments.
Where does that leave the price of Gasoline? Remember, high gas prices hurt corporate earnings. Logistics costs go up, company earnings go down. If corporate earnings are lower than expected, companies stop hiring, the economy cools, and oil consumption goes down. This week, we will see a very large number of corporate earnings releases. Most likely, high gas prices have not yet hurt their bottom line. If corporate earnings are strong, you will likely see $4 gas here for the summer. My bet is that earnings will be strong. Couple this with the fact that gas consumption goes up in the summer, unfortunately, I do not see relief in the next few months.
Again, if earnings are weak, we will definitely see a pull back in Oil but I do think most companies in the S&P 500 will put out strong numbers.
How can we lower gas prices? This is pretty easy, lower demand or greatly increase supply. We could try to pump more oil domestically but it would not be nearly enough to offset the higher prices. There is a lot of controversy regarding drilling in the Arctic National Wild Life Refuge (ANWR). There is debate on how much oil is actually accessible in this area and even if this was approved, experts agree that it most likely would not have any immediate impact on prices. We have heard Obama talk about tapping the strategic reserve. This has been done in the past and had some moderate success in lowering prices, but again, this is politically complicated and probably will not happen or will not happen on a scale large enough to impact pricing.
As I said, unless the economy cools, we'll most likely see high Oil (thus high gas) for at least a few more months. However, I think once these high prices start changing consumer purchasing habits, we will see prices drop. The challenge is that this probably will not happen in the next few months. It is my opinion that unfortunately gas is not dropping drastically anytime soon. We'll know more in a few months and perhaps I'll write another hub then on gas.
CommentsLoading...
Terrific analysis. Even if our efforts at producing our own energy supply does not affect what is happening now, we had better get to it for the future. Voted up useful and awesome.
Excellent hub LRC. Don't you find it interesting that gas prices remained stable all during the moratorium? As soon as it was lifted, prices started to rise; a sure sign there is market manipulation. The problem, of course is that regulations probably allow them to do exactly what they are doing.
Sadly, it will be a hard lesson learned, but until Americans get on the bandwagon and decide to reduce our dependence on fossil fuels, we will go through this again and again. We keep paying the cost for dragging out feet and never acting until there is a crisis.
voted up/awesome
What makes you think that gas prices are mainly constituted by the economical situation and players in the US?
If world economy has more demand - and that are in first place the BRIC countries, then prices will rise. With or without the US trying to be more self contained, with or without Libya playing the unstable part of OPEC.
I am currently in Russia, one of the BRIC countries. Russia has an economy with lots of troubles but with definitely no doubts about producing more oil than consuming in its own economy. Guess what the filling stations in Moscow charge: Just about 1 USD/liter, almost 4 bucks/gallon.
LCR - i am with you on your points 1 to 4. No 5. is a little overestimating the role of the US economy and its gambling hell on Wall Street.
LRC - Another outstanding contribution to hub land.
I saw a guy on TV the other day who claimed that we currently have 16 different blends of gasoline as mandated by the EPA. According to him, we could drop the price of gas instantly if we could get the EPA to give a temporary relief on this regulation. The theory being that the refineries have to guess at the demand for any particular blend, and start and stop production to meet these demands. Thus there is an artificially caused effect on the Supply and Demand rule.
I do know we are not supposed to put links in the comments section, but here is some further information on this subject.
http://www.gao.gov/products/GAO-05-421
If it is true that we could drop gas prices instantly, I would be all for at least a temporary stop to this requirement.
Great hub as usual, keep 'em coming my friend.
@ Hmrjmr1 - thanks for your comments, I had not seen those numbers but they do make sense
@ POP - thanks for your comments. Perhaps it is time that I stop by the Inn for a drink!
@ Fay - you said it perfect. It is really going to repeat again and again until we make measurable differences.
@ CHRIS57 - you certainly bring up reasonable points but the US is the largest consumer in the world of Oil. As we saw in 2008, the world economy moves with our economy.
@ POOLMAN - your comments (and links) are always welcome. That is an interesting point, I'm going to look into it!
If the Fed end QE2 and stops easing, then the U.S. Dollar should recover. Although not linked as strongly as in the past, oil should respond by moving lower as the Dollar strengthens. Around the same time as that happens later this year, demand destruction, a calmer Middle East (not sure if that's going to happen), and more supply coming online due to current high oil prices should help push oil and gasoline prices down from these levels. They probably have only so far to fall though, as we face Peak Oil, as demand is approaching supply. Only another recession will really bring oil and gas prices down significantly.
Excellent hub LRC. I've thought for a long time that the oil futures market ought to be restricted to those that can make or take delivery. Presumably that would kick the sharks out of the market and price would be determined by supply and demand
chefsref - what a great idea. Such a simple solution it will probably never happen.
Rock, insightful comments, I agree with you. I think QE2 stopping in summer will most likely help slow inflation and higher commodity prices.
@ CHEFSREF - I completely agree. So my father and I both say the same thing all the time. If you want to trade oil futures, you should have to take actual physical delivery. If this law was passed, the price of Oil drops $30-50 per barrel right away. There would be no more speculation money pushing up the price.
LRCBlogger
Just another side of the story.
Obama wants to release the oil in the reserve to increase the supply. Sounds like Obama is agreeing the need to increase production of oil. All the pumping today on PUBLIC LAND is because of Clinton and Bush.
Allow me to clarify
1. When oil comes from private land sources, the government only gets revenue when the private companies make PROFIT. Obama complains about the oil companies making billions of profit. Why would Obama and the Democrats complain when the companies are paying (the American taxpayer, Treasury ) 40% of those profits to the treasury. WHAT A DEAL, the government gives the companies $4 billion in subsidies to search for oil, the oil companies spend more than the $ billions to find oil (on public land ) and more $millions to get permit approvals to drill. Note that without profit the treasury starves for revenue.
2.When oil comes from public lands, the government has a better deal. The oil companies pay for the leases( they are open bided on), receives a oil royalty of about $18.00 a barrel on each barrel produced. Somehow the better deal for the taxpayers is to pump on public land because not only profits are gained but the addition of lease money and royalties increase the REVENUE returns.
SHELL OIL in Alaska after spending $ millions to procure permits have been waiting 2 years for permits to drill.
In the gulf 5 oil companies have waited 2 years for the permits that have been denied by the Obama administration. The Obama administration has been held in contempt of a federal judges court order for the past 1.5 years to allow the permits to be released. The oil moratorium shut down oil in the gulf.
On 3/17/12 Petrobas, a George Soros investor of a Brazilian oil company, received the permits to drill in the gulf. Petrobas was given a US Government loan approved by President Obama when he returned from a Brazilian trip.
The President makes jokes of ‘’ drill baby drill’’ and claims that he doesn’t have any control of high prices.
On the campaign trail, Obama contends that the Republicans claims to open the drilling fields will not reduce the prices of oil. Why not try to prove the Republicans wrong? Obama’s idea to getting us off the need for foreign oil is to shut down US production. The Man is showing his true colors.
yo this is noot right gas rice should go dwn
Hi Jon, sorry for the late response, despite what you point out, we'll produce more oil in the US this year than in any year in the last decade. By the way, the claim about Petrobas is false. You can find the answer on factcheck.org or any other credible news verification site. If you are familiar with the Import/Export bank and understand how they work, you'll see Petrobas was given a loan to buy US equipment. This decision is completely independent of Obama and has nothing to do with him. Just part of the everyday capitalism.
LRCBlogger
You be the judge!
1.Media Matters
In October 2010, Soros openly announced that he was donating $1 million to Media Matters, which would use the money to hold “Fox [News] host Glenn Beck and others on the cable news channel accountable for their reporting.”
http://www.discoverthenetworks.org/printgroupProfi
2. Obama Underwrites Offshore Drilling REVIEW & OUTLOOK August, 18,2009
The U.S. is going to lend billions of dollars to Brazil's state-owned oil company, Petrobras, to finance exploration of the huge offshore discovery in Brazil's Tupi oil field in the Santos Basin near Rio de Janeiro. Brazil's planning minister confirmed that White House National Security Adviser James Jones met this month with Brazilian officials to talk about the loan.
http://online.wsj.com/article/SB100014240529702038
3. Latin American Herald Tribune Caracas Friday April, 6,2012
U.S. Government to Loan Brazil's Petrobras $10 Billion
The U.S. government is preparing to provide up to $10 billion in loans to finance the development of massive hydrocarbon reserves off Brazil’s coast thought to contain 80 billion barrels of high-quality crude, an amount that could lead to a six-fold increase in Brazil’s current proven reserves and transform that nation into one of the world’s 10 largest oil producers
http://www.laht.com/article.asp?ArticleId=340859&C
SOMEWHERE along the way 0bama and Soros are involved.CHECK IT OUT.
Just lower the gas prices and make people happy. No need for greed
new guy
THE PRESIDENT SAYS that we must put more oil in the marketplace inorder to lower gas prices.What the President says is not what the President is doing.
Check it out and you be the judge.
Obama feeling the heat from oil producers
The TRUTH
http://www.foxnews.com/on-air/your-world-cavuto/in/v/1523106926001/obama-feeling-the-heat-from-oil-producers/?playlist_id=86929
3/26/12
Executive Branch - POLITICS ENERGY CRISIS
Domestic drilling advocates WARN of increased global demand for oil, dwindling supply
http://www.foxnews.com/politics/2012/03/26/domesti
Let's hope that Congress wakes up!
Jon, read your links. If you read the last link you provided, it does indeed say the import/export bank is providing the funding. This bank is controlled by a board (3 republicans, 2 dems). Obama doesn't control nor dictate how they use their money.
LRCBlogger
''Obama doesn't control nor dictate ''
You are joking?
Jon, there are 3 branches of Government in the US. If you want to make laws, appropriate money, etc, it starts with an act of congress. The US is not a dictatorship.
ah ah ahhhh, everytime i go to the gas station it feels like a three finger prostate exam
I agree with jon
LRCBlogger
CHECK THIS ONE OUT!
HOW OIL SPECULATORS DRIVE OIL PRICES UP, AND WHY
At a June 17 Congressional hearing about how oil prices are affected
http://www.solarfeeds.com/how-oil-speculators-driv
June1, 2007 oil $65 a barrel June 27,2008 oil $ 140.21 a barrel
4/13/12
Obama order coordinates federal oversight of 'fracking,' gas development
obama needs to make gas goes down before i just drive a bike 24/7
Bob
Obama says that he can't make the prices go down, sounds like the joke of the day.CHECK this link of old.
7/09/08
HOW OIL SPECULATORS DRIVE OIL PRICES UP, AND WHY
At a June 17 Congressional hearing about how oil prices are affected
Hmrjmr1 Level 3 Commenter 13 months ago
LRC - I've seen estimates that put the 'risk' premium on oil at $20-25 per barrel; couple that to the declining dollar and you can account for most of the price above say $70 per barrel. The price we are going to pay for not having a long term strategy of increasing domestic supply and converting much of the oil demand to nat gas. (per gallon equivalent price of about $1.50)
Great Hub.