Saturday, January 20, 2007
Enjoy It While It Lasts
During the Summer of 2005 I bought my first $3.50/gallon gasoline, on the San Juan Islands in Washington, only to discover upon returning home that, far from being a local phenomenon within Washington, the price had spiked locally too and I was forced to pay $3.25/gallon here in Boulder. I thought I was a goner. When the untimely death of my minivan forced me to buy a new car last January, I accordingly selected one which gets 35 miles to the gallon, having calculated carefully that the monetary advantage of a Prius getting 45-55 mpg would not justify the extra upfront cost, amortized over 10 years, even at the expected price of $5.00/gallon for gasoline. I gradually and painfully adjusted my thinking to the new reality of $3+/gallon henceforth.
Last week I paid $1.98/gallon, today $1.96. What's going on?
One theory advanced before the recent election was that the oil companies, those all-powerful omniscient price manipulators, were foregoing billions of dollars of profits in order to keep the Republicans in office. The American electorate wisely saw through that and turfed the Republicans out anyway. Now I guess the Evil Oil Barons are cleverly throwing away even more money in order to keep the Democrats in office....(cont.)
Another theory, one which I myself bought into, was that increased demand in India and China had moved prices up sharply as an elementary example of classic supply and demand in operation. I have no doubt that demand for oil and gasoline products has risen dramatically in both countries as they have started to get rich during the last decade. Apparently, according to this theory, both countries have suddenly quit driving during the last year or so, and prices have dropped back to something downright comfortable as a result. Not likely.
What's the real explanation? Who knows? I think the oil market is simply way too complicated to easily model. If it were easy, lots of big trading companies would be making spouts of money without risk. As demand rises in India and China and elsewhere, the price goes up, sure, but with a higher price, it suddenly becomes worthwhile to drill in lots of places that weren't worth it before and supply starts to increase. That tends to drive the price back down, and who knows which way the big oil producers like OPEC are going to jump, given all this uncertainty?
I don't know about Goldman-Sachs, but for me I'm afraid the price of gasoline is about as predictable as the date of the next blizzard in Colorado. I say, let's enjoy it while we can.