14A060 Why So Low? by Jim Davies, 11/30/2014    

Not that I'm complaining, mind. Gas prices are about a whole dollar less than they were early this year, and I'll take it! Nonetheless, inquiring minds would like to know: why? For if they can go down they can also go up, and if we're at the mercy of mysterious irrational forces I'd like to know. So I asked - who else - the Net.

It's clear enough that the retail gas price has been driven down by that of crude oil. Margins between tanker and roadside pump are very tight, and the price of crude has fallen so much that even the MSM noticed; down from $115 a barrel to under $80. Since there are 42 gallons in a barrel, that ~$35 drop accounts for most of the $1 retail reduction. But still, why? - we benefit not from the benevolence of the butcher, baker and oil driller but from his self interest. Why would the Saudis and the Venezuelans and the Russians slash their revenues so savagely; where's the self-interest in all that?

There are 2½ possibilities; demand fell, supplies rose, or a bit of each.

Demand hardly fell. There is a long-term improvement in average vehicle gas mileage, but nothing sudden about it. Meanwhile there's a vast middle class emerging in India and China, thirsty for cars and fuel to move them.

At first sight, supplies didn't rise either; there is still a mess in Iraq, so that big source is in peril still. In any case, who would give away their reserves of oil when the price is falling? Yet the only article I found that made any sense fingered "oversupply" as the culprit; this, found on oil-price.net. It first identifies one respect in which demand has fallen: Japan fired up its nuclear reactors again this Summer so its heavy demand for carbon fuels, active since Fukushima, suddenly vanished. Author Steve Austin writes that industrial production in Europe has peaked (he expects another recession) which has also trimmed oil demand.

Well, maybe. But supply has increased in three places, he says: the US embargo on Iran came to an end, Libya got its oil act together this year after the chaos following Gadaffi's death, and US fracking operations are producing more domestic oil, cutting the US need for imported oil very heavily. Okay, that makes sense. An oversupply, hence a price fall. However it's being heavily compounded by Saudi action; this Reuters view says the Saudis are waging a price war on the US so as to hobble rising US production.

That's one kind of war I'd favor, if the latter is the main explanation. Cartels hinder price wars (better known simply as "competition") but cartels are always unstable; when a crunch comes, one member will eventually step out of line and pursue his own interests. Of course! Why else is he in business? Government cartels, like the global club of oil producers, are not true businesses, but eventually good sense may emerge, as it seems to have done here.

The US/Saudi relationship is uneasy. The deal, made by Nixon in 1973, was that the US would restrain Israel from troubling its neighbors, and SA would sell oil only for dollars. This led all other oil producers to sell only for dollars also, hence the huge worldwide slush fund of US dollars that has made it so easy for Americans to import useful stuff and to export pieces of green paper, or their electronic equivalent. This handy arrangement is poised to end.

The fact that SA can slash its sales price by $35 a barrel and still clear a profit shows that it (and maybe the others) have been making massive profits thanks to the cartel, at our expense. The price of fuels for several years past has been high not because oil reserves are running out, but because producers have conspired to keep them in the ground and squeeze as much out of customers as possible. That's why the prospect of US oil independence, as a result of fracking and tar-sands production to our North, has put them all in a tizzy. SA may hope to make all that unprofitable by slashing prices - but will hurt itself at least as much as it hurts US domestic producers. That's why the Keystone pipeline is important, and it's interesting to note that its main opponents - Democrats, Mary Landrieu excepted - are acting in favor of the oil barons in Riyadh, who have been busy financing Sunni warriors all over the middle East. Strange bedfellows. The SA price cut may be aimed not just at the new US producers but also at Iran and Russia, probably with the FedGov's connivance, to disrupt their plans to stop selling oil for dollars.

So, how will all this change after government here has evaporated? The first effect will have preceded that happy day by a year or so: the dollar will have totally collapsed, so nobody will sell oil for dollars any more. The medium of exchange that will be used is anyone's guess, but mine is that gold will be picked; partly because the main producer - SA - has plenty of gold already, and partly because all other government fiat currencies are likely to have followed the US dollar into oblivion. Clearly, the world market for oil and every other kind of goods will be far healthier when using a form of money none of them can counterfeit.

Next effect: domestic production will increase fast, all artificial restrictions having been removed. Offshore drilling for example will develop rapidly, as firms homestead claims to drilling rights in areas of the ocean. It will increase, however, only where it's profitable to drill given the current market price of oil, which may well be quite a bit lower than today; that could result in keeping oil in tar sands and deep under rocks where it is for a while.

That lower price may also delay further the development of fuels that are not carbon-based, though as always that will depend on how well the work of making those many techniques less expensive succeeds. I wish it well, and the condition of freedom to experiment will be fulfilled, so there can be no better environment for that work to prosper.