Must We Always Ride The Roller Coaster of Gasoline Prices?

There are 22 large oil companies around the world. 90% of the world’s petroleum product is handled by those companies. Here are some familiar names, in order, #1) BP, #2) ExxonMobil, #3) Shell,
#4) TexacoChevron, #5) ENI (Italy), #6) ConocoPhillips, #7) Occidental, #8) Devon, #9) Hess, and #10) Marathon. Other large US companies are Kerr-McGee and Unocal.

Oil is traded - bought and sold - in the Futures Market. On the Ohio River where I am familiar, a large amount of oil is shipped via barges. Some barges hold 1 million gallons. Others are even larger. Local distributors “buy” a bargeload of gasoline today, May 26, for delivery in the week of July 15. Buy today for future delivery. The crude oil for this July load has not been pumped from the ground when the finished product is bought. Most places get their bulk fuel via oil pipelines.

In the fall, there is a shift in the refineries to household fuel oil for the northeast US. In the spring the shift is back to gasoline for the summer vacation season. Because most metropolitan areas have only a few distributors, it is true that most retail stations get their gasoline from the same source. Gasoline is truly a fungible product.

For reasons that might once have been valid, persons who do not own distribution sites are permitted to bid on the Future Market. For example, if you and I think the northeast US will have an early fall and drive up the price of home heading oil, we might pool our money and buy a bargeload of fuel oil for delivery in December. Today, it might sell for $1.50 a gallon. In December, we own a barge of heating oil. If it is a cold winter, we can sell it for $2.00 a gallon, or more, making a large profit. OTOH, if it is a mild winter, we can get only $1.25 a gallon, thus losing a lot of many.

Speculators. What may have once been a useful service in years past, especially before the computer era, those old time speculators did little harm. But today, with more accurate long term weather forecasting and much better demographics, a speculator is in a very sensitive position. Because there is very little surplus refining capacity, a speculator entitled to a few barges of home fuel oil can make a huge difference in the price paid by a lot of people. So, if you agree this is not a good thing for society, to let a very few speculators set prices of an essential commodity, what can be done about it?

I suggest a simple rule. No person or firm not owning or in the day to day business of distributing or retailing petroleum products, may not re-sell any product for 180 days after the purchase. This is far enough in advance that weather will be minimized as a pricing factor. It would make predictability too chancy even for speculators. That is, for buyers who cannot sell the product themselves but must depend on re-selling it back to others to re-sell. A speculator.

Companies and individuals actually in the oil or gas business will buy 90% of their anticipated need historically based, and ahead of time for the best price, then buy the last part of their supply on a day-to-day basis. In this way, they can “average” their costs to reach an agreeable price and for consumers, a lower and more stable retail price.

For References
2020 Vision. The US EIA (Energy Information Administration) reduced their forecast for Saudi oil production to 15.4 mb/day in 2020 and Middle East OPEC countries increasing to 35.2 mb/day by 2020 from 20.7 mb/day in 2002.

These estimates were further reduced in the 2006 Annual Energy Outlook, in which Middle East OPEC production was projected to be 26.9, 18.5, 26.4 mb/day in 2020 assuming $50/$85/$33 oil prices respectively.

Strategic oil reserves. At 2005 US consumption rates, over 7 gigabarrels per year, the US SPR would supply normal US demand for approximately 37 days.

Oil reserves: world total, 1082 gigabbls. en.wikipedia.org...

22 Largest Oil Companies, www.globalpublicmedia.com...



[edit on 5/25/2006 by donwhite]