6/01/08 (US):
Soaring Oil Prices - An Expert's View
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We're all talking about it but what are the Experts saying about soaring oil prices?
Paul Rolniak, vice president of the Colorado-based Energy Analysts International, has testified as an expert witness on numerous court-related oil industry issues. He's also been cited in major publications, including the Wall Street Journal and Los Angeles Times.
Below are his responses to five questions the Journal Star posed on subjects relating to the worldwide oil industry and gas prices in the U.S.
Q: Given that supply and demand remain the driving forces of the oil industry - from worldwide crude production and availability to pump prices - will recent and coming increases in refining capacity measurably impact pump prices in the near future?
A: No, the largest component driving forces of the price of gasoline are crude oil prices. Base crude oil prices are determined by supply-demand fundamentals, the price of the dollar in terms of gold, and speculators in the investment community. Other components in the price of gasoline (transportation to refineries, refining, marketing, distribution, taxes, etc.) are relatively small and stable.
One thing to keep in mind, the last time prices ran up greatly in the late '70s early '80s, when the price of crude and hence the price of gas went down, both state and federal governments increased taxes at the pump.
Q: Is crude oil in effect the new gold, a commodity investment as a hedge against a volatile stock market? And in that context, who is making the most profit from this spring's surge in crude oil prices?
A: Yes, crude is in effect the new gold. Crude oil producers are making the most money. But the smartest ones are demanding payment in more stable currencies, like euros rather than dollars. Our government, seeking to increase exports and (to) have a more favorable balance of trade, let the dollar slide against world currencies and gold. Virtually all the increase in the price of crude since 2005 is directly attributable to the decline in the value of the dollar. The price of crude in ounces of gold per barrel has stayed relatively the same.
Oil companies are making more money in terms of devalued dollars, and then the (U.S) Senate calls the oil company presidents before a panel to berate the oil companies for having such high profits.
Q: Consumer demand appears to be dropping this driving season in light of rising pump prices. Will that have a significant impact on pump prices or be largely negated by the rising worldwide oil demand, such as in China and India?
A: If worldwide demand keeps increasing against limited increases in crude production, there should be limited impact on the price at the pump. Consumers' best defense is use less - drive less, take public transportation, carpool, buy a higher mpg car or maybe a flex-fuel vehicle. Some people have moved closer to work. Be aware if buying a flex-fuel vehicle, that retailers will charge for E85 (fuel) effectively the same price or more as gasoline to correct for mpg difference.
(After submitting this answer, Rolniak said pump prices might be impacted "significantly" by, if true, a recent estimate of up to a 6 percent decline in gas demand nationally this year.)
Q: Is it possible to predict pump prices over the coming months with any certainty? If so what price ceiling are we looking at?
A: This summer, prices will be high, say $3.50 to $4 per gallon. Longer term, it is possible that alternative fuels and modification of driving patterns, vehicles, aging population, etc. will reduce demand to the level where it impacts prices via lowering the demand for crude oil. This remains to be seen.
Q: Just as big-box stores have knocked off many smaller businesses in areas they share, are we seeing the approaching end of independent stations as mass retailers, such as Wal-Mart, penetrate the retail gas industry? And if so, how can those mass retailers under-price even independents?
A: Mass retailers can buy from large suppliers at bigger discounts due to their large volumes. Mass retailers also can sell at lower (profit) margins and still stay in business (by having a larger-scale store to support the operation). Margins for mass merchandisers can be low, zero or negative, and they can still stay in business. No, we are not seeing the end of the conventional gasoline retail business, but there will be further consolidation (reduction in numbers and realignment of business models).
© X-Pro 2008
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