Handling Finances

Everybody has their favorite pet theory about why gas prices are so high. It could be the evil excessive profits taken by oil companies, risky speculation by profit-seeking investors, a simple case of supply vs. demand or all/none of the above. It’s very hard to know since most of these effects are unquantifiable and it seems like politics has more to do with a person’s answers than actual facts.
Whatever the cause, high gas prices aren’t as bad as most people seem to think. Here in America, gas has been almost ridiculously cheap compared to the rest of the world. By itself that’s not a problem or anything, but it does mean that we’ve become used to thinking of gas as an abundant and cheap source of energy. We’ve built an entire country with sprawling suburbs and extremely limited train and subway access that heavily depends on cheap and abundant gasoline. We’ve scorned fuel efficiency and invested heavily in the largest, most powerful vehicles.

Since oil takes millions of years to form in any useful quantities, it is clearly a limited resource at the rate we’re using it! I should qualify that — we will never run out of oil altogether, it will just become more and more expensive to extract from the ground until some other form of energy is cheaper. We know we’re going to run out of oil at some point, so clearly we need to prepare well in advance. Except, we’re not remotely prepared. We’re decades away from any other fuel source for our vehicles and that’s assuming significant investment for those decades.

One option that gets thrown around a lot is to allow drilling in X or Y location that is currently being protected for Z reason. This will make the situation worse — prices will drop, investment will drop with it and we’ll be right where we started except X and Y reserves will now be depleted.

An unpopular solution.

Quite simply, we need to feel some pain in order to prepare for the future. When prices are low, some people simply deny that there will ever be a problem, the majority simply doesn’t care as long as their tanks are full and a second minority complains ineffectively that our increasing suburban sprawl and refusal to develop alternative technologies or even simply more fuel-efficient vehicles is just digging us further into a hole. When prices hit $3.00 per gallon in America, the former and latter groups grew for a while and then everybody went back to not caring. Now that gas costs $4.00 per gallon, people are really starting to hurt and put a significant bit of money toward changing our habits now so we can avoid wasting a huge amount of money changing once we’ve exhausted our last reserves and gas jumps to $5.00 or $6.00.

High gas prices aren’t all good — the poorest among us who have no cushion will suffer the most as they have to choose between gas to get to work and food. I certainly don’t enjoy paying twice as much for gas as a couple years ago. At the same time, this is the first I’ve seen long-term efforts to increase the reach of mass transit, to develop electric and hydrogen-fueled vehicles and to actually make token efforts to use currently available technologies to increase fuel efficiency in the average American car.

I won’t claim that the days of the 4-car family or the 1-kid family with and SUV and pickup that gets used once a year are over. Many of us have grown quite accustomed to the convenience of these light trucks even if we could easily do without. I’ve even heard some people who genuinely feel entitled to the affordable use of a Ford F-350 used primarily in a daily hour-long freeway commute. In the end though, we’re just going through the pain at the start of any new exercise routine. It won’t be easy, and it might not feel good at first, but in the end, we’ll stop wasting a limited resource, limit pollution, and save billions of dollars that are currently going toward oil companies and oil producing countries. And hey, if we can avoid pumping up the last of the American reserves in the process, then we might truly become less dependent on foreign oil rather than putting ourselves in a desperate position by using all our oil first.

I was listening to NPR and learned something very interesting on why oil is so expensive

these days.  At well over $100, oil is now more expensive than it ever has been — even adjusting for inflation.  There are some obvious reasons like increased demand in China and India and the possibility of an American invasion of Iran, but these factors are not enough to account for the current high price.  I found it interesting that apparently investors are driving up the price of oil — it’s not just supply vs. demand any more.  The report noted that funds like pension funds and sovereign wealth funds are putting billions of dollars into funds that trade oil much like others trade currency and stocks.

These oil-trading funds had a total of $9 billion in 2000.  Now, the oil-trading market is well over $250 billion.  In comparison, the whole world uses about $8-9 billion dollars a day, so it’s no longer just a inflation-proof investment but a full-blown speculative bubble!

While the high prices are making many oil companies a whole lot of profits, they’re also hurting industries like airlines and trucking that are heavily influenced by the price of oil.  I’ve seen a number of reports lately of airline representatives talking about how they won’t be able to run much longer at current levels.

What does this mean for us?  Well, unfortunately, the price of oil is being driven ever higher as speculative investors rush in to be a part of the soaring profits, and there’s really no way to know when it will end.  On the plus side, the bubble is bound to burst and the price of oil will plummet, but again, it will probably hurt consumers again as speculators drive the price of oil lower than it’s really worth.

Just like the ’90s tech bubble and the recent sub-prime financial bubble, the oil bubble is going to burst some time and when it does, a lot of people will lose money (and a rare few will end up on top).  I’m going to try to avoid investing in oil-related stocks in the near future since I’m not interested in trying to carefully follow it to have a chance of pulling out near the top of the bubble.  Of course, that won’t change my investing much as I’m largely invested in index funds and ETFs.

In short, expect the price of oil (and gas) to continue to climb way further than makes sense.  Also expect it to plummet when it stops climbing and investors try to protect their profits.  It’s unfortunate that such basic staples are affected by this type of speculative investing (similar to the increase in grain prices, though that was more organic and driven by farmers than investors in my understanding) but it’s just the way our capitalist world works.  Just stay alert and watch for this type of speculative bubble and above all, stay diversified!