Thursday, May 22, 2008

You know what I'm tired of hearing? "Oil prices rise to new record on supply worries."

You know why I'm tired of hearing that? Because there are no freaking supply worries. Supply has been as steady as ever. There are no disruptions anywhere. The headline really should read "Oil prices rise because they can and there's nothing you can do about it so just bend over and take it." Yes there are artificial constraints on supply, but existing supply is not going anywhere.

There's a whole confluence of issues driving prices higher. Among them include price caps in China. Essentially that means that the Chinese (you know, those driving demand supposedly) don't actually pay what it really costs for oil. Their government subsidizes it. China also has windfall taxes when suppliers there sell oil above $40 per barrel. That means that the suppliers have no incentive to increase their supply. Thus China is artificially inflating the prices that we pay because they're constraining their own suppliers.

Another is that the oil companies are recording huge profits but are not using them on new development. Instead they're returning that money to the shareholders. In general that's a pretty good idea, but they're doing it way too much. Instead of returning $30 Billion in profits to the shareholders, how about using $20 Billion of that to build a new refinery? You know what that would do? Give us more supply and them more profit. Instead of that, the oil companies themselves are now constraining supply. Effectively, the oil companies are living it up right now and will be paying for it later. Sounds just like our government and the typical consumer. Let's spend all of our money now and worry about how we'll buy food next month later.

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