Who's to blame for $4 gas

A really good article came on CNN today, explaining why we have $4/gal gas. It's scarily dead-on accurate, too, which is saying a lot for most of the garbage that spews from the toxic airwaves of CNN.

Whenever friends/family/colleagues/ignorant folks ask why are gas prices so high and bitch and complain, I offer two simple reasons coupled to a bold explanation. Basically, 1) we're handcuffing ourselves because we can't further explore for our own energy or increase refining and 2) everyone else wants oil, now too.

Imagine going to the store every week to get a gallon of milk, and for the first few weeks, the gallon was on the first aisle, right when you walk in the front. However, each week you notice the milk keeps getting further and further away, causing you to hit the 6th, 7th, 8th aisle. Soon, you have to walk to the far back of the store to get that same gallon. Other factors affecting the milk are that the store will only sell you a half gallon, or perhaps the store only has a certain type of milk. Oh yea, the price of a gallon has increased four-fold in less than a decade, too.

And now, we're at the point where that milk is 4 blocks away...

Instead of reposting the whole article, I'll reiterate the main point each year on what the author is saying. Full article here.

2004: Demand pressure
Demand grew and pushed supply to its threshold as economies in third world countries started to surge. Think soccer moms with SUVs, and increased energy usage in China and India.

Why we are finding less oil and using more of it is partly a result of the low prices during the 1990s. Those low prices - partly caused by low gas taxes in the U.S. compared to other developed nations - both encouraged rapid consumption domestically (think SUVs) and underinvestment in new production by the world's oil companies.

Gasoline prices topped $2 a gallon for the first time ever in May of 2004.

2005: The storm
In addition to hurricanes Katrina and Rita (recall that Rita thrashed our refining infrastructure more than Katrina), the BP's Texas City refinery exploded in March, knocking out nearly 500,000 bbl/day of refining capacity. That accounted for 2% of domestic refining capacity.

Basically, 2005 fully explicated how fragile the petroleum refining industry is. 25% of domestic refining capacity is along the US Gulf Coast, and KatRita barreled through that region, making coastal towns and the refineries its bitch. Also, producing platforms in the Gulf were shut down as workers evacuated from offshore.

A new refinery hasn't been built in the United States in three decades.

2006: Hot tempers
Uh oh. Now we have world powers playing a war of words with each other. Nationalism at its finest.

Iran and the spat over its nuclear program dominated the news in early 2006, and combined with Israel's invasion of Lebanon in the summer of that year to cause another spike in gas prices to over $3 a gallon.

Some say the Bush administration's provocation of Iran and Venezuela, coupled with a botched occupation of oil-exporting Iraq, has contributed to the geopolitical tension. But defenders say that, in the long run, the administration's actions will eventually lead to a more democratic - and thus stable - global supply.

However, outlook remained strong, albeit difficult, as a major discovery, Jack 2, was made mid-year by Chevron, Devon and other players in the deepwater Gulf of Mexico. Deepwater technology is still in its infancy, and only now bringing those projects online is it even economical to drill and produce from that deep.

2007: Tight supplies
Reconstruction and demolition/salvage efforts stemming from KatRita still haunted the US refining and production industry. Not only that, a major labor shortage reared its head, in terms of manual labor, such as construction and procurement, but also in white-collar positions like engineers as the industry gets older.

New supplies of oil from non-OPEC countries were supposed to come online in 2007 and ease some of these supply bottlenecks. But problems in Kazakhstan and Russia - as well as sweeping drilling bans in the United States - mean global consumption is growing twice as fast as non-OPEC production.

And now OPEC, which hold two-thirds of the world's oil reserves but sees a global economy humming along despite $130 oil, has little incentive to increase production.

Why would a country further open its reserves and up its production when the big gorilla in the room can’t even find it for himself in his own damn country?

2008: Speculators swarm
With the US economy looking like it is going to slow down and enter a mode of sustainability rather than growth, the commodity markets (oil, gold) have boomed. Banks and investment firms hedge, and continue to push the market up.

Money flowing into oil - and commodities in general - has been especially sharp over the last 6 months as investors look for good returns amid falling stock prices and an inflation hedge against a falling dollar.

Global demand for middle distillate fuels (diesel, kerosene-type jet) has skyrocketed, as the market for such fuels is becoming increasingly tight. Diesel fuels, unlike gasoline, are distillate, meaning it’s not a blend. It’s straight up vaporized from a barrel of crude.

However, as the demand for the middle distillates is ever-increasing, the immediate and easy access to supply of such fuels is shortening. Heavy and sour crudes are becoming more and more prevalent, but the demand is being pulled to the middle of the barrel.

So refiners have to expand their process and add equipment and/or operations to remove sulphur and other unwanted impurities.

"You can't just point the finger at speculators," Michael Haigh, head of U.S. commodities research at the investment bank Société Générale, recently told CNNMoney.com "Fundamentally, the markets are where they are supposed to be."

Others are less certain.

"The fundamental picture to us doesn't justify the price," said Lehman's Crandell. "It's kind of suggestive of a bubble."

Now can you see why we have $4/gal gas??