Our previous blog post made the connection between China's increasing demand for imported oil, The People's Republic's subsidies for the black gold ($40b p.a.) and the policy's inflationary effect on U.S. gas prices. Common sense (and The New York Times) suggest that other "managed economies" are using the same pro-growth strategy, amplifying the inflationary effect on world oil prices. "The oil company BP, known for thorough statistical analysis of energy markets [excellent hat tip to Big Oil!], estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels." Hey, what happened to "Let's all blame the evil speculators?" Anyway, you think the U.S. is "addicted to oil?" Malaysia spent 7.5 percent of its economic output on oil subsidies. Indonesia shelled-out $20b this year to keep prices down. And where there's no political will to let the free market do its thing, there's no way they'll stop. "You talk about subsidies, you’re not only talking about the economy," asserts Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. "You’re talking about politics.” I.e. his job. So they're damned if they do, damned if they don't. And for this you pay at the pump. [thanks to OldDavid for the link]
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Most of the demand growth went to countries who are subsidizing? THAT explains the 500% inflation rate in oil!!! [/sarcasm]
Eventually the subsidies game plays itself out. While other countries, including our own, become more efficient energy users, these folks will fall further behind.
That 7.5% of GDP could become 10% or more should another Katrina sized Hurricane slam into the Gulf Coast or worse, if some fearless leader decides to bomb the Iranians.
Yes, Robert…its me again.
Couldn’t help but reply to this.
You see, as one of the “speculators are to blame” cynics, you never explain why, in just a few months, oil went from 80 per barrel to 140.
This, my friend, is speculation.
Pure and simple speculation.
Nothing, no nothing, in the way of imports or world events caused this or could cause this short of catostrofic.
It was speculation.
And gas has been falling rather quickly in the US.
Today in Illinois its down almost 25 cents a gallon.
Now, how odd this follows the drop in oils market price.
This, Robert, is speculation….not subsidizing in the far east.
Gas dropped around here and the collective “ahhh” was audible all weekend as if this means we’ll see $2.40 gasoline again soon.
Watched Ted Koppel’s multi-part series on China on TV this weekend and the scale at which China is growing is staggering… You don’t have to listen to anything he says to see the growth in consumption in China.
Folks – we might start drilling closer to home but it would be wise for America to take this as a clear sign to wean ourselves off of gasoline and diesel where we are able and to produce as much energy as we can with renewable sources of energy.
I am amazed at how little is being said by our current Presidential candidates about energy and American debt control.
I’ll be voting (as usual) with my dollars as our budget will allow.
“The oil company BP, known for thorough statistical analysis of energy markets [excellent hat tip to Big Oil!], estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.”
That statement suggests that current levels of demand do not support the current inflated world price. The only way to get consumers to willingly increase consumption at the current prices is to pay them to use it. If using their own money, they aren’t interested, and are motivated to find ways to use less.
It’s pretty straightforward — futures prices help to set the spot prices, and the futures market is overheated with speculators who are motivated by price volatility but who are indifferent to the price. The two markets track fairly closely together, and spot prices slightly exceed futures prices most of the time, so the actual end user gets to pay for all of that speculative froth created by the futures players, even though they don’t ultimately use the oil.
If the market was trading rationally, you wouldn’t have just seen a $15 drop in the price within just a few days for no particular reason, just as it rushed up before that, again for no particular reason.
If so much of the world’s oil production wasn’t located in a bad neighborhood (the Middle East), there wouldn’t be as much to speculate about. Much of the price is based upon what might happen, not what has happened — if the fit hits the shan, such as Iran going into meltdown mode, people would like to be long in the market trying to profit from the invariable spike.
Add the falling dollar and low returns on the alternatives (shaky stock market, low interest rates and crashing real estate), and oil has been an appealing speculative investment to money looking for a home.
Sure other countries directly subsidize their gas prices but the US & Canada have been subsidizing gas prices indirectly for decades. National Geopgrahic had an excellent essay on oil prices and world oil demand a few years back. In Canada gas prices were around 80 cents a litre when the article was published and they estimated if the government didn’t indirectly subsidize the cost to consumers and tack the true costs of oil (Health care, research & development grants, environmental clean up costs, etc) gas to consumers would be well over $4 a litre. So I don’t think it is fair to blame any country that directly subsidizes their oil.
Pch101 Says:
Very well put, Pch101.
Lots of reasons for speculators to put their money into oil futures.
But for so many people to openly deny this is really odd.
My brother just sailed his boat from Egypt over to Turkey. In Egypt he topped off his diesel tanks for about 40 cents a gallon. Egyptians pay about 17 cents a gallon. This is heavily subsidized.
In Turkey, and Europe, diesel is costing closer to $8 a gallon. A huge difference. This has to make one think that arbitrage is in play. How much profit can an Egyptian make by topping off the tanks in a fishing boat and then meeting an Italian or Greek fishing boat and selling them his fuel for even $4 a gallon?
In the case of Egypt, the US tax payers are actually paying this subsidy. Egypt is the 2nd largest recipient of US aid, $1.3 billion a year. Without this cash, they could not afford to do this.
Venezuelans are making money privately selling their subsidized fuel to Colombians next door. How much money is wasted by subsidized fuel nations by selling the fuel on the black market? How much tax revenue is lost by the buying nations who can’t tax the black market?
We need to start to import subsidized oil. At least as with Egypt, we’d get some of our tax money back. :)
Busbodger :
Folks – we might start drilling closer to home but it would be wise for America to take this as a clear sign to wean ourselves off of gasoline and diesel where we are able and to produce as much energy as we can with renewable sources of energy.
I keep hearing “wean ourselves off of gasoline and diesel”, but nobody has suggested a viable alternative fuel and feedstock for these things:
-> Airplanes
-> Shipping (for fishing and cargo transportation)
-> Plastics
-> Fertilizers
-> Medicines, and packaging of them
-> Mining and extracting metals, minerals, water, or nuclear fuel
-> Food planting, harvesting, and storage/preservation to support the current population densities.
It’s plain to see, at least for me:
We are NOT going to be able to use hydrogen or electric power sources to fly about or fuel our agricultural equipment, or to make plastics, medicines, or food-saving, disease-preventing packaging.
@ZoomZoom,
apparently some chemical farms are now buying dung from big feed operations, substituting that for fertilizer. I’d prefer to see more organic farming, and I suspect there will be more. Food, after all, is biological, not chemical, and organic farmers have greatly reduced cost of inputs. The best organic farms are rather intricate, information-intensive, and extremely efficient (google polyface farms). I suspect there will be a lot more local food production as well. As for airplanes, I suspect we may see more train travel, and less travel generally. Nonetheless, the transition is going to be slow and very difficult if successful. But we need to work in that direction. We can’t throw up our hands and say it’s impossible.
At some point, wouldn’t spending increasing percentages of these developing nations’ budgets on fuel subsidies become economically unsustainable for them? And then they’d have to drop the subsidies or lower them to the point that prices in those countries are closer to the going rate, thus crimping their demand.
At some point, wouldn’t spending increasing percentages of these developing nations’ budgets on fuel subsidies become economically unsustainable for them?
The oil importers such as China would, because they are buying the oil on the world market at the current (inflated) price. The Chinese recently increased fuel prices by 18%, so the process is underway.
It’s not clear that the oil producers would do this, though. They have political motivations to keep their citizens happy with low fuel prices.
Occasionally, you get the irrational actor such as Chavez, who is plundering his oil industry to feed his social programs, while simultaneously diverting oil production that could be sold at high prices to cheap domestic use. I think that someone like him will need to leave office before Venezuela’s behavior becomes more rational.
ZoomZoom said: I keep hearing “wean ourselves off of gasoline and diesel”, but nobody has suggested a viable alternative fuel and feedstock for these things: […]
From:
http://peakoildebunked.blogspot.com/2008/01/326-detailed-breakdown-of-us-petroleum.html
We see your entire list amounts to almost nothing compared to the oil consumed by passenger vehicles.
Solve that 41% problem and you effectively have no more problem. If you still have a problem, move on to trucking (12%).
Alex Rodriguez :
July 28th, 2008 at 9:32 am
Most of the demand growth went to countries who are subsidizing? THAT explains the 500% inflation rate in oil!!! [/sarcasm]
For a basic necessity to current industrial economy with no practical substitutes at this time, it makes sense. If rising prices don’t curb third world nations from developing their own oil based economy (and becoming second world nations I guess), then demand will continue to increase despite the cost of oil.
If you’ve been watching the news, you can see what happens when these countries reduce oil subsidies, people riot/protest.
And, to answer a previous poster: what makes you think that the citizens of these countries can see that they are indirectly paying for the oil through increased government spending that at least eventually comes from their pocket? Most US citizens can’t seem to figure this out judging by who runs this country-we did vote for our leaders afterall. Politicians get elected based on what they promise to do for their constituents, and the people who vote for them can’t seem to figure out they will have to pay for these programs through either direct taxation or indirect taxation (inflationary borrowing and spending).