Dropping the Price of Gas to $2.50 a Gallon in a Week

Paul Michael — Thu, 28 Apr 2011 10:24:09 +0000

If speculation can raise the price of oil, why can't it drop it?

That's the question that's been taking up a big chunk of the conversation between my friends, and I have to admit, it seems very possible.

President Obama announced recently that he plans to withdraw the $4 billion in oil subsidies because the companies are making too much money. They don't need them, they don't deserve them, and that money could go to much better use.

You have no arguments from me on that one. Oil companies need tax breaks like millipedes need more legs. And when Republicans start agreeing with repealing the tax breaks, well, you know this is a non-partisan issue if ever there was one.

But while I applaud President Obama's intentions and motives, I don't see this being the answer. In fact, I think it could make matters worse. And the reason comes down to one word — speculation.

Speculation Drives the Market

Right now, oil prices are being driven up by speculation, not by sudden demand or lack of resources. Yes, the wars are certainly not helping, but they do not account for the price rising by almost $2/gallon since the election of 2008. That's double the price in just two years. Has your salary doubled in two years?

You may recall that a few years ago, the average price of a gallon of regular gasoline climbed well over $4. That was down to oil speculation, pure and simple. The oil companies made astonishing profits, and then the price fell again, below $2/gallon. (See also: Gas Efficient Driving)

What happened? Did we find a massive reserve of oil bubbling below the surface of an easily accessible stretch of land? Nope. It was speculation, too.

Why Can't the President Use Speculation to Lower Oil Prices Right Now?

Is that a very naive outlook? Or could it actually work?

For instance, what if he gave a huge speech tomorrow stating that America is...

...putting billions of dollars into exploratory drilling.
...opening up Anwar for oil extraction.
...cutting major deals with Saudi Arabia and other oil-producing nations.
...opening up access to our massive oil reserve.
...siphoning oil from the Iraqi oil fields.
...demanding a minimum 60 mpg in vehicles by 2018.
...expanding wind, solar, and nuclear power programs, reducing the need for oil.

What would happen? Oil prices would drop sharply, and quickly.

It's a simple concept. More oil means less demand for what's out there right now, and prices fall. Gold continues to rise in value, but imagine what would happen to the price if an enormous gold mine, abundant in the stuff, was discovered.

Rare Is Valuable; Plentiful Isn't

Similarly, President Obama's intentions to cut the tax breaks mean one thing to me — higher prices. Sure, we get to stick it to the oil companies and save $4 billion, but that's money we aren't going to see any time soon. Remember, the country has quite the debt to pay off. But if oil companies are getting less money, that will only make the price of oil go up. If they aren't getting help to do more drilling, oil is even more valuable.

Now, I'm not saying we do any of the things I suggest President Obama should say. The stock market runs on rumor and, yes, speculation. If there's the merest hint that oil is about to become a lot more plentiful, traders will dump oil in favor of something else. Probably gold. And that's fine by me. I don't need gold to drive to work. Gold does not play a major role in every single thing we use, from the computer in front of you to the food you'll eat today. Gold, silver, diamonds, platinum, and frozen orange juice, they can all hit record highs. But oil, it's one of life's necessities, and it should not be traded in the same way. So, why not use speculation in our favor for once?

I believe gasoline will hit $5/gallon this year. It may even reach $6/gallon. I also believe that some well-chosen words by our government, regardless of actual intention, could help avert that eventuality. Many of my friends agree. But what about you?

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Much Does it Cost Every Time you Get Into Your Car?

Nora Dunn — Thu, 28 Aug 2008 02:00:10 +0000

I recently found myself living out in the countryside near Melbourne Australia. And aside from gas being referred to as “petrol” among other Australian idiosyncrasies, living out here could be equated with life in the countryside just about anywhere:

Anything within 50 kilometers (31 miles) is considered “close”
You have to drive to get anywhere (sometimes including your own front gate)
The cost of living can be more expensive (depending on how judicious and creative you are)

And last but certainly not least:

You will spend a small fortune on gas. Petrol. Whatever.

Here in Australia, if the price of gas is much below $1.50/liter (the equivalent of about $5.68 /gallon), people practically dance in the streets with joy; it regularly hovers at a price point much higher. And so one day driving back from running some errands in town on a week when I had traveled into town more than I would have liked, I glanced down in shock at my gas gauge: empty. It seemed that I had consumed more gas in the last week than I had realized.

This led me to a minor budgeting revelation: Every time I travel into town, I spend almost $10 in gas. This was a shock to the system; if there was a bus, I would have happily taken it to be sure. But out here, no such thing exists. (Such is the price you pay to live in the country; a price happily paid by most who live here).

This revelation led to an immediate change in attitude towards driving:

Carpooling is now an active goal, if not a necessity (not only for the environment, but also better value when driving).
A trip into town doesn’t happen unless at least three separate and important tasks can be achieved.
Mail order is king!

When I started to even more closely examine the cost of gas/petrol, I realized how much more there is to driving: insurance, maintenance, and wear & tear for starters. If I averaged out the cost of these factors and added them into each trip into town, my excursion shoots up even further to approximately $13.

$13 just to go into town; to get some groceries, make a social call, or see the dentist. That’s not pennies. And here’s the corker: Although I live in the country, town is not all that far away, and it is all highway driving.

How many people who live in the city (or a bedroom community) commute 20 miles or more to work, and in stop & go traffic no less (which increases the cost of gas and wear & tear)?

How many people who live in the city (and commute in their cars) actually pay higher insurance premiums to do so?

How many people who live either in the city or the country don’t think about all this every time they get into their car?

So the next time you say you’ll just “hop in the car” to nip off somewhere, think about how much that little trip will cost you. You may decide in the end that the trip doesn’t have to happen today, or that maybe you can kill two birds with one stone by adding another errand to your list.

At the very least, it pays (literally) to figure out for yourself how much it costs every time you get in your car. Only then can you make a rational frugal decision as to whether or not putting the key in the ignition this time will fit into your budget, and not just a life of convenience.

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: