US has more domestic supplies and less demand in approximately a decade plus, but oil prices persist at highest ever levels, (especially for this time of year). The factors now driving the price spike are any of these 3 depending on your perspective: expectation of continuing global demand rising, political uncertainty particularly regarding Iran conflict and/or speculation.
Oil is a highly fungible whose price is largely established by trading in global markets rather than on basis of domestic production costs and/or demand. Whether petroleum costs $5 or $50 dollars per barrel to produce, it will sell at the prevailing global market rate subject to quality differences, logistics to transport and any “special deals” made between seller and buyer. (For example, Iran may sell its oil at discount to China and India as Europe and US impose purchase embargo).
Whether US has to import 50% (approximately current figures) or 10% of oil consumption, it is subject to a global market. Any cut-off of Iranian oil would affect the global market and thus directly impact upon US prices. While US overtime may hope to produce most if not all of its energy via domestic sources, it cannot and does not have capacity/longer-term reserves to meet such through current dependence on petroleum. Alternatives will have to assume a significant portion of demand, sooner or later. “Drill, drill, drill” cannot be ramped up under most optimistic scenarios to meet current demand, and over the longer term it is not a viable policy without conservation and/or alternatives.
If somehow production of petroleum in this country was ramped up it would nonetheless be sold on basis of global prices. Unlike natural gas, petroleum and its refined products are relatively easy to transport to meet the highest price globally, and the advocates of free markets would demand that no restrictions be imposed.
Which brings us to the last factor driving prices up-speculation. Almost everyone agrees it exists, although the views regarding impact may vary from limited to highly significant. Speculation is not driven by the fundamentals of supply/demand. There is adequate supply to meet demand, and shortages are not anticipated in the near or medium term if ever. (Unlike the narrative of pre-2008 crisis, there is no shortage of refinery capacity and some refineries have been shut-down).
Political unrest/chaos has been the pretext for most of the current rise. However, it may be demand for petroleum as financial commodity through ETF’s (Exchange Traded Funds) and direct market participants that is driving the price spike. Acting effectively in unison, the “investors” in petroleum/refined products can be more effective than OPEC in maintaining prices. Of course, such alleged/implicit manipulation may come to be subject to free market forces, but as in 2008-2009 that would only occur once it kills the “golden goose” – in other words the economy is pushed into recession. Please see our Blog for Video “Petroleum Prices Spike, But Why?” - http://diplomaticallyincorrect.org/films/blog_post/petroleum-prices-spike-but-why/45705.
Free market may function well if truly free, but investors act in concert even if not necessarily in explicit collusion to amplify and prolong trends/direction of prices. There is again a trend to press prices up. The cycle though is ever more boom or bust also impacting the overall economy in similar extremes. “Drill, drill, drill!” thus is a myth as reflects the promise of substantively lower prices for energy and its implication for overall economic health.
See our Blog for Video Report - http://diplomaticallyincorrect.org/films/blog_post/investigating-gasoline-price-spike/47454
By Ambassador Muhamed Sacirbey – Follow @MuhamedSacirbey
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