gimme-five | The blog of a busy guy.

TAG | oil

Apr/08

10

High Gas Prices and Speculation

I’m writing this article for the primary purpose of getting my thoughts onto a page.  I always hear all of this talk about how the only reason that oil prices are so high is because of speculation.  But that argument does not sit well with me because it ignores the underlying reason for speculation.  The argument runs that oil/gas is not really as expensive as it is, because the prices are only high because of speculators screwing around in the market.

There is some truth to the speculation argument.  Sure, speculators are buying oil, and the more demand to buy a commodity, the higher the price goes.  But, this begs the question: why are they buying oil?

Speculators in this case are people that predict the price of oil will be higher in the future than it is now, so they, in the simplest case, buy oil now so they can sell it later when it is more valuable.  If the price of oil goes up, it is because lots of people believe the price will go up in the future.  That begs the question: why do they think oil will go up in the future?

And then we’re back to square one: why do commodity prices rise?  If the only answer to that question is that prices rise because people think speculators will drive them up, then aren’t we just in an infinite cycle of inflation?  Obviously, the answer to that question has to incorporate something other than whether speculators plan on buying the commodity or not.  So I’ll give the classic, broad, economics answer: prices rise when the commodity becomes scarcer.

Scarcer can mean less supply, more demand, or a combination of both.  And I don’t think there is a clearer example of scarcity today than oil.  The world supply of oil is finite.  Sure, we find new sources of oil every now and then, and we develop new technologies to extract oil from places we couldn’t get it from before, but no matter what, we have to deal with a finite supply on planet earth.  Thus, every day, the supply of oil shrinks, and that contributes to a decrease in supply (along with occasional shocks from OPEC).  Additionally, world demand for oil is ever-increasing.  And not just in America.  When the Tata Nano, that tiny $2000 car from India is released, and it puts hundreds of millions of new drivers in and around Asia on the road, gas prices will skyrocket [this is undoubtedly on the speculators’ minds].

So the high gas prices you’re paying may be technically due to “speculation.”  But there must be reasons for speculation.  I believe the primary reason is anticipated increased demand and anticipated decreased supply of oil.

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My car is currently on its deathbed.  My 1990 Toyota Camry has been so good to me for so long.  However, I took it in to a repair shop a few weeks ago because I thought the rear cylinders were leaking.  I wasn’t too worried because rear cylinder repairs are only a couple hundred bucks.

Turns out I was right… sort of.   Not only were the rear cylinders leaking (slightly), but both front CV joints on my car are cracked, I have a bunch of “valve issues” and I’ve got oil leaking on my timing belt.  Total projected repair cost: $1800.  My car’s blue book value: sub $500.  So I’ve come to the conclusion, that sometime in the near future, I need to find another car.

I’ve been looking around at new and used cars, and I’m probably going to go with the smallest, cheapest, most reliable thing out there, as I am a law student rapidly accumulating debt.  However, the one aspect of this decision that bothers me the most is that because the average car on the road is getting bigger, and more and more people are driving SUVs, roads have become more dangerous for drivers of smaller cars.  Essentially, it’s a prisoner’s dilemma of safety.  All else equal, you can be safer if you drive a bigger car, at the cost of making everyone else less safe.  The irony is that if everyone drives bigger cars, then we’re all just as safe as if we all drove smaller cars (or maybe even less safe if you factor in the increased likelihood of flipping over), because with each additional larger car on the road, there is an increased risk of being hit by a larger car, which will cause more damage than an equivalent accident with a smaller car.

Honestly, this will not affect my decision.  Because I believe that pollution, resource depletion, and congestion are such serious problems, I would be a hypocrite to go out and buy a big car.  Plus, the probability of getting into an accident where the “safety rating” of your car is an issue is insignificant – despite what commercials tell us.

Yet I can see how many people, especially those with families, choose to buy a bigger car primarily for safety concerns.  Ironically, the danger they are trying to protect against is generated by other people, just like them, who are trying to be safe.

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