This article is a critique of a Washington Post article titled “Why does Gas cost $4 a gallon or more?” The article is part of a series that is focused on the prevailing dynamics of energy pricing and the resultant revision of prices every now and then. I discuss the article and the way in which it seeks to explain the factors behind the rise in oil prices.
Any discussion about Oil prices must take into account the factor of “Peak Oil” and its effects on the world price of oil. The phenomenon of peak oil states can be described as when the oil production hits a peak and the rate of extraction and production falls below the level of what it was earlier and thus the production is said to have hit a “peak” in terms of the output.
Thus, this is one major criterion for determining the output of oil and subsequent dynamics of energy production are dependant on how much can be extracted with depletion of the oil supplies. This is the major factor behind the current increase in oil prices. In the next paragraphs, I take a look at the factors listed in the article about the price of oil.
The article states that “Much of oil comes from mature fields that are now approaching their peaks or already in decline”. The data quoted states that output is declining at the rate of 8 per cent every year and the oil companies have to pump in more than 7 million barrels a day to keep up with demand. As we can see, this leads to a situation where excess production has to take place without corresponding discoveries and thus this is a “double whammy” as far as oil prices are concerned. Since the rate of production increases to keep up with demand and with falling reserves, the outlook for world oil is grim.
The other point that is made in the article is about speculation in the world markets for crude that is beginning to have an effect on the prices. Thus, as speculation leads to a kind of game where prices are subject to the market dynamics ruled by hedge funds and speculators and not on the actual supply of oil, the use of oil price as a financial instrument is leading to fluctuations in the price of oil.
Apart from the supply and market mechanisms governing the price of oil, there are concerns about the supplies getting disrupted because of political instability and terrorist attacks on installations. The article mentions the wars in the Middle East since 1980 that have disrupted the production and supply of oil to the world markets. As it is widely discussed by experts and commentators, the wars in the Middle East are about the geopolitics of oil and the desire of the US to maintain adequate supplies by ensuring access to cheap oil.
The most obvious answer to why gas prices are going up is that the demand is growing at a faster pace than the production. There has been a marked increase in demand to the extent of around 15% over the last decade. This is because of rising affluence in China and India and the rest of the developing world that is growing economically and thus needs oil to fuel its growth.
Thus, the main factors driving the gas prices can be said to include the demand, peak oil, speculation and disruptions to supply. There are other factors like the falling dollar which is a currency denominated for the trade-in oil. In conclusion, it is apparent that we are facing a “decision window” where we need to ensure that we have alternate sources of energy if we are to make the transition to a new energy economy smoothly and prevent chaos on a large scale.
References
“Why does Gas cost $4 or more a gallon?” The WashingtonPost.com.Web.