Black Gold, Texas Tea

Why o why does gasoline get so expensive? It's enough to make you want to cry, especially after you bought that 8-cylinder Ford Explorer when gas prices were at about $2.20/gal.

On the right we hear about how every level of government have their hands collecting flat rates and variable percentiles. On the left we hear the usual anti-capitalist, anti-corporation, anti-profit screams of "huge profits". You can make some money, but don't make too much. So from the start then, I don't think we can expect big oil to want only small profits and neither for federal, state or any government to willfully reduce taxes on Black Gold.

Supply and Demand are what drive market forces up or down, and this is no different for Black Gold or Texas tea.

Keep in mind that corporations have a responsibility to generate a profit for their shareholders. Spending millions on drilling here and drilling there had better be successful more than 50% of the time. You would need a large credit card to set up a drilling rig on any ocean to check out a hunch.

Harold Hotelling (1931) proposed that the equilibrium rate of return on an exhaustible natural resource would rise at the rate of interest. The logic is that in equilibrium the producer is indifferent between holding a barrel of oil in reserve and producing one barrel now when the rate of appreciation on the reserve is just equal to the rate of return from pumping now and investing the proceeds.

Determining the true costs associated with extracting crude, shipping, refining and holding reserves is truly complex. However, this aspect is likely only 20% of the factors related to fluctuations in crude prices. When crude reaches $60-$70/barrel even the Alberta Tar Sands in Canada are making money while extraction costs are about $13/barrel.

Long-term evidence suggests that the market, more than any other issue, determines trends in oil prices. The market reacts to any news, positive or negative about the stable flow of oil from the world's largest reserves.

That brings us to the Middle East. Although the Middle East produces a quarter of world oil supplies, it holds between two-thirds and three-quarters of all known oil reserves. For that reason the United States and the West have continued to define the region as being vitally important.

So when Iran's president vaticinates that the Zionist Entity will soon be destroyed, the markets react in fear, and crude prices shoot up. There is thus little gain for some to calm the rhetoric, especially if it increases one's clout in the region and increases income flows in the country's treasury.

Vitally important to America and the West is key here. If you miss this point, you will never understand oil pricing.

For more than half a century a central drive behind the American military strategy and foreign policy in the oil-rich region has been to deny the control of such vast resources to powerful enemies who would thereby become even more powerful and thus more threatening.

Any US Administration, like a board of directors at a big oil company, must ensure the economic viability of the country by protecting its interests wherever they may be. Any impact on the flow of Black Gold to America will certainly impact the price at the pump.

American foreign policy traditionally regarded stability at any price notwithstanding the form of government or the human rights of the local inhabitants. So if a ruler could keep the peace (and the flow of Black Gold coming) but had some nasty little quirks like torture rooms, rape rooms, or genocidal tendencies, those were secondary concerns. As a related aside, many Americans view with disdain its friendship with Saudi Arabia. After all, that is where Whahhabism (Muwahhidun) began and is based.

President George W. Bush's doctrine or new foreign policy post-911 is based partly on paying attention to the form of government and thus the human rights of the local inhabitants, because of the resentment engendered by America propping up tyrants for sake of flowing Black Gold. Before you scream China, let me remind you that there is very little evidence of Chinese hatred toward the West, and little evidence of Chinese terrorists. Commerce is flowing just nicely, thank you very much. I suppose their human rights will come under consideration only after we've seen demonstrative hatred toward America sometime in the future.

Replacing tyrants with democratic institutions never experienced in a part of the world would surely scare the markets and drive oil prices higher. This is a long-term view aimed at improving America's image amongst the locals, to reduce the venomous hatred that apparently precipitated 911.

Many from that part of the world proclaim that the Palestinian issue is the prime reason for their animosity toward America, because the US supports and defends the Zionist regime.

The displaced Palestinians however cannot be appeased with anything short of the right-of-return (to their homes and lands from where they were evicted when Israel was created by the League of Nations). Demographically this would destroy Israel so unless Israel is bent on self-destruction, this is unlikely to happen.

Apparently the best ways for America to gain credibility, respect and friendship (according to Arabs and Islamists) in the area are (a) abandon Israel, (b) remove all military equipment and personnel off of Arab and Islam holy lands, and (c) stop meddling in any Middle Eastern government. Astonishingly, there is such a possible Administration in America's near future.

Some claim the answer to be in weaning America from its dependency from that region, if not from oil as much as possible. That's a little naïve, because Israel is not in that equation, thus the thorn would remain. The American military presence in the area, as the world's police force would remain to prevent like-Kuwait invasions and consolidation of oil reserves under few US-friendly governments in that region, and of course to protect Israel.

So if the proverbial thorn were to remain even in a substantial market pullout, the result would be a drop in crude oil prices, which would only propel America back because the reduction in demand would decrease crude prices. Affordability is the angel of consumption.

Throw in that China and India that have increased demand and thus pressures on supplies on oil as developing industrial powerhouses. That is a current and strong future element of increased demand, contributing to the increase in crude prices.

Even if taxes on gasoline at the pump average 30-40%, don't expect any pressure to be successful at reducing them. Likely, big oil will be blamed for making huge profits.

In Canada, advocates of reducing taxes on gasoline are told "Moreover, even a substantial reduction in federal taxes on fuel would have only a small impact on pump prices. This is due to the fact that high gas prices are less a result of taxes than of recent substantial increases in the world price of crude oil." (http://www.fin.gc.ca/toce/2005/gas_tax-e.html - Oil and Gas Prices, Taxes and Consumers - Section 6).

In true socialistic fashion, the document contends: "Another consideration is that gasoline tax revenues are used to support a broad range of programs that are valued by all Canadians, including health care, education and programs for seniors." Don't be screaming for tax reform on gasoline anytime soon in Canada, lest you be called a mean person who doesn't care about health care, education and seniors.

On a positive note, I suppose if the huge reserves in the Middle East were to ever deplete, America could start drilling in its domain, like an underground reserve. Maybe antagonistic countries like France and Germany could become friendlier with America at that time.

The answer today is the same answer as back in 1982, when Saudi Arabia was inclined to increase production, thus the supply, which brought crude prices down and some stability in the market returned.

Basic supply and demand economics have always worked for Black Gold too. I can only guess at what the trigger for such a request would be (to the Saudis). Maybe it would be when an increase in inflation is deemed to be in large part to increases in fuel costs, and only when such increase in inflation negatively affects the economy.

Unless of course, the average citizen demands it before then.