Sunday, April 24, 2011



When energy costs rise, then costs for everything else rise. It takes energy to produce food, construct housing, transport goods and services as well as to energize our homes and transport us to work. Let's look at what causes our energy costs to rise.

Many people, particularly the politicians and the media, will tell you that the oil companies are gouging us and making huge profits because they have a monopoly or oligopoly. Perhaps they are correct. More likely, though, are the following factors that play into the mix.

FUTURES SPECULATORS. There is a market for commodities called the futures market. Individuals and various financial entities buy contracts of certain goods like grain, corn, pork, etc. in order to hedge themselves against a rising market. Included as commodities is the oil market.

When a person believes that the price of oil is going to rise to $140 a barrel and the price of that barrel, if purchased now, is at $100, then the person buys the contract at $100 now so that he has oil at $100 while everyone else has to pay the "spot" price of $140. The market goes one step further by allowing for the person to buy the option of purchasing at $100 sometime in the future for a small percentage of the actual price of a barrel of oil.

This gives the person a hedge against the increase in the price of oil by paying the option price, say $10. If the price of oil stays the same or goes down, they let the option expire without exercising the option. Thus, the oil companies ( or energy companies) can insure themselves that they won't get caught with huge increases in oil prices by buying options. California's PG & E put the state into bankruptcy because they refused to buy futures and when the spot prices spiked, they had to substantially increase energy costs immediately or go belly-up.

If, however, you're one of those who believe the politicians that the energy companies are gouging the public and reaping huge profits on the backs of the people, then you should buy energy stocks. Being a crybaby won't do any good.

NO NEW REFINERIES. The EPA has made it so expensive to build new refineries that no new refinery has been put in service for at least 35 years in the U.S. Yet, demand for refined oil and gas has continued to rise each year. The old refineries are outdated and inefficient, but repairing these refineries is a lot less expensive than building new plants. Environmental impact statements, public hearings and regulations make building new refineries in the U.S. too expensive. It's easier to build the new plant overseas and import the refined products back into the U.S.

OUR GOVERNMENT REFUSES TO ALLOW DRILLING IN THE U.S. The United States has huge amounts of oil and gas in the continental United States. We have huge amounts available offshore but the companies are prohibited from drilling by our government. Yet, U.S. taxpayers are funding other countries like Brazil to drill in the Gulf in exchange for the rights to buy the oil they produce. Yes, we pay them twice and lose American jobs in the process. Thus, the cost to the U.S. consumer goes up.

ETHANOL. We require that our gas be blended with ethanol because we want to encourage "green" energy in the U.S. Ethanol is a lot more expensive to produce than oil. We use much energy to plant, harvest and refine the corn into energy. These laws also take the corn and grain out of the food supply so the costs of these items go up at the retail store. Corn and grain are also used as feed for livestock so the price of beef, pork and poultry also goes up. So, the U.S. citizen again pays double for things because of government interference in the free markets.

Ethanol has also caused some fuel tanks, lines and injectors to break down. If you have a tank for your boat made of fiberglass, that tank will break down and the particles will get into your fuel system and clog your injectors/carburetors. So you have to do some expensive retrofitting to assure yourself that you won't get caught at sea when your engine fails.

DIFFERENT BLENDS OF GAS REQUIRED BY DIFFERENT STATES. Some states require as many as 10 different blends of gas to be offered to the consumers. These blends may change with the seasons. The refineries must not only make sure that they have the right amounts of gas at different blends available at all times, but must shut down to reconfigure the plant every time they change the production of the different blends.

Can you imagine the inventory headache caused by these regulations? If you have a lawnmower that requires one type of fuel, a car that requires another type of fuel, a gas blower requiring yet another type of fuel and a chain saw requiring another type of fuel, you'd have to keep a gallon of each type on hand rather than just one gallon to refuel your powered tools.

DOLLAR IS WEAKENED. The United States has printed trillions of dollars in the past three years. The dollar is the currency of record in the world markets. The dollar is used to measure the cost of oil. It is the dollar that has gone down. The oil has not gone up in price. China, the Soviets and other countries are meeting right now to replace the dollar as the currency of record. When that happens, you will see chaos in the world's financial markets. That includes oil.

It would be interesting to see how people recharge electric cars without the cost of electricity going up. Electricity is produced by burning oil or other fuels so it's unlikely that electric cars can be considered "green" and safe for the environment. The electric companies don't yet have the infrastructure in place to use solar, wind and geothermal energy.

When these costs go up, it hurts everyone. The Kupunas are the most vulnerable because the vast majority of them are on fixed incomes.

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