The Oil and Gasoline Crisis

With the price of gasoline rising above $4.00 a gallon, the Republicans in Congress are quick to blame the price rise on a dependence on OPEC oil and the moratorium on drilling. They have two bills that are being debated in the US House of Representatives: One to allow oil companies to drill off the eastern coast of the US and the other to allow oil companies to drill off the western coast of the United States.

The Republicans claim that drilling for more oil will help lower prices and make us less dependent on the Arab nations for oil. The Democrats claim that the Republicans are acting as if the BP oil spill of 2010 never happened.

The Republicans talk about how much safer the new oil rigs will be because of the research into the causes of the BP oil spill. The Democrats talk about how the fishing industry in the Gulf of Mexico was destroyed by the BP spill. The Republicans talk about the unemployed workers who use to work on oil rigs before the BP oil spill and how Obama's moratorium is leaving many workers unemployed.

The Democrats talk about how many oil rigs are operating and the Republicans talk about how many oil rigs are not operating and how many new oil rigs are not being worked on.

But where is the truth? Are the current prices of gasoline and oil due to a shortage? Will the license to drill for oil in the Atlantic and Pacific Oceans lower the price of oil?

To find out if there is an oil shortage, we need go no further than an internet search. Do a search for the phrase 'oil glut 2011.' It will reveal numerous sites that describe the current oil glut in the world. This leads to the second question: If there is an oil glut, then why are the prices of gasoline and oil so high? The answer to this question is a single word often used in the stock market: futures.

What is a future? Basically it is speculation about the prices of oil and gasoline in the coming months or years. Let's say I form a contract with Jim to buy gasoline from Jim in a year. The contract specifies that I will buy 100 gallons of gasoline at $5.00 per gallon one year from now. I am bound by that contract. I must buy the gasoline at the price specified in the contract one year from the signing of the contract. If in a year, the price of gasoline is $6.00 per gallon, then I would have a bargain. Because Jim would have to sell me 100 gallons of gasoline at $5.00 dollars a gallon and would lose $100 on the sale.

However, if the price of gasoline dropped to $4.80 per gallon, I would have to buy the gasoline at the contract price of $5.00 per gallon. This means that if I am going to sell that gasoline to the consumer, I would have to sell it for more than $5.00 per gallon in order to earn a profit! Hence the price of a gallon of gasoline at my gas station might be $5.50 per gallon even though there is a glut of gasoline on the market!

What does this have to do with a shortage? Absolutely nothing. Now, in view of this, lets consider allowing the oil companies to drill for oil in the Atlantic and Pacific Ocean. Let's assume that a huge deposit of oil is found in the Atlantic Ocean. How would that affect speculation and the resultant price of gasoline which is refined from oil? Right. It would drive the price of gasoline down!

I say that both the Republicans and the Democrats are correct. The Democrats are correct when they state that we must protect our fishing industry from the disastrous effects of another huge oil spill. The Republicans are correct when they say we must find new deposits of oil in order to become less dependent on oil from the Arab world.

So . . . Why can't they compromise?