Oil Suck

After rising to almost $115 a barrel (42 gallons per barrel), oil slid to $98 a barrel in this past week.  Across the country prices at the pump approach and in some states exceed $4 per gallon.  When gas prices rise, presidents call for an investigation into speculative trading and market manipulators and this president is no different.  This past week President Obama called on his Attorney General, Eric Holder, to lead a “Fraud Squad” which will root out those nefarious speculators and bring them to justice. 

There’s only one problem – the speculators are state, local and private pension funds buying “paper oil”, Joe and Mary hoping to grow their college fund by buying a few hundred shares of an oil related ETF.  Frank hopes to pay off his student loans with a proven timing system on the Proshares Ultra Oil and Gas ETF (DIG).  Hedge fund managers include oil as part of a commodity exposure mathematically designed to mitigate inflation risks to their clients’ portfolios.  None of these speculators either produce or want delivery of any oil.  The companies – airlines, for example – that do use lots of oil and trade oil futures to lock in operating costs probably daydream that some administration or some Congress or the feeble Securities Exchange Commission or the Chicago Mercantile Exchange would keep those who buy and sell “paper oil” out of  the market.

For the past half century this country has sucked on oil.  Below is the daily U.S. crude oil consumption during the past 30 years as reported by the U.S. Energy Informaton Administration (EIA) (Source) Consumption has declined slightly in the past two years, thanks to the recession.  Recent quarterly figures from the EIA, however, show that 2010 consumption was already up to 2008 levels.

Since 1980, we have introduced more fuel efficient cars and “cut” our gasoline with ethanol.  Our population has concentrated more in urban areas, and we have spent billions of taxpayer dollars on new and improving public transportation.  I combined data from the EIA and the Census Bureau to get a per person per day consumption rate.  All this hard work and we still suck up gas.

Each day all the people on the planet use about 85 million barrels of oil.  The U.S. uses almost 20 million barrels a day, a bit less than a quarter of the world total.  Ten years ago, we consumed a bit more than a quarter.  Growing prosperity in developing countries is increasing the demand for oil.

In the 1970s, President Nixon spoke about developing a comprehensive energy policy and every president since then has repeated the pledge.  Do we have such a policy?  Not a chance.  This country sits on top of vast reservoirs of natural gas yet there is no comprehensive plan to increase the use of this clean burning fuel.  In other countries, Ford and GM make cars that use Compressed Natural Gas (CNG) but the lack of any cohesive U.S. policy to promote this technology and delivery system has forced carmakers to abandon this country, the largest oil market in the world.  For more info on CNG vehicles.

Federal and state politicians will likely continue to twiddle their thumbs as they have done for the past 40 years. Exxon Mobil is the largest oil company in the world and will likely benefit from increasing global demand for its products.  When  President Nixon spoke about a comprehensive energy policy, Exxon’s stock traded at an adjusted closing price of less than $1.  Today the stock trades at $83 and they pay a dividend, currently about 2.3%. 

As shown above, our consumption has changed only slightly despite reduction measures.  Older people generally drive less and as the population ages, miles driven will likely decrease during the next 20 years.  But will our overall consumption decrease?  We like big in our cars.  We like trucks and SUVs.  We like to drive.

Posted in: oil

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