Why Gas So High?

Moving closer to $4 per gallon.  Summer is coming so if history is a great predictor of the future, we are  in for more “pain at the pump”.  But what is the real reason for $4 gas?  I will get to that in a minute as the mention of summer reminds me of a classic.

“Hot town, summer in the city – Back of my neck getting dirty and gritty – Been down, Isn’t it a pity – Doesn’t seem to be a shadow in the city – All around people looking half dead, Walking on the sidewalk, hotter than a match head – But at night it’s a different world – Go out and find a girl – Come-on, come-on and dance all night – Despite the heat it will be alright – And babe, don’t you know it’s a pity – That the days can’t be like the nights – In the summer, in the city – In the summer, in the city”

Summer in the City – The Lovin’ Spoonful (1966 – Geez)

Ok, back to the gas situation.  Read a very interesting article at NPR yesterday.  In December 2008, 60 Minutes correspondent Lesley Stahl asked Saudi Oil Minister Ali al-Naimi how much it cost Saudi Arabia to produce one barrel of oil, he didn’t blink: “Probably less than $2 to produce a barrel.” If it costs only $2 to produce a barrel of oil, then why do we pay over $105 a barrel?  That’s right.  $2.oo per gallon to produce but $105 per gallon to us, or whatever the most recent price is. Nice margin!

But why?  OPEC.  They own 80% of the oil reserves yet only produce 33% of the world’s oil.  The reason is because they only produce the oil to impact their own economies.  OPEC countries produce almost nothing but oil. Their population is growing by leaps and bounds, and because Saudis pay no income tax, the House of Saud needs more and more money to keep its citizens happy, and avoid the fate of toppled leaders in Libya, Egypt and elsewhere.

Since the beginning of the Arab Spring, Saudi King Abdullah almost doubled his Kingdom’s budget, committing billions in subsidies, pensions and pay raises in an effort to keep his subjects from storming the palaces.  So to balance their budget oil will need to be at least $110 per barrel in 2015.  Sounds like a basic business model to me.  If expenses keep growing then you need to make more money.  When you sell oil you can just charge more.  Now that is a great business model.

The bill for keeping the Persian Gulf monarchies in power is now being footed by every American. Every time we fuel our car we send an extra 35 cents per gallon, or roughly $6 per fill up, to the Save the King Foundation. Since oil goes into everything we buy from food to plastics, this adds about $1,500 annually to the expenditures of the average American family.  But those Persian Gulf monarchies are doing quite well thank you.

So at a time when our country cannot come close to balancing a budget and where we are drastically slashing many programs here at home, we are also funding social programs for other nations. It is a sad state of affairs that in the 21st century the world’s most strategic commodity is still being controlled by a cartel.

Given this situation, unless we are going to adopt alternative energies really quickly we will be looking at $10 a gallon by 2020, so they can balance their budget.  Epic change is required.

You can read the full article at http://www.npr.org/blogs/money/2012/04/02/149684373/the-real-reason-gas-costs-4-a-gallon

Enjoy the weekend.