Basically, many economies suffer from the "Dutch Disease" where the easy profits in oil and gas crowd out all investment into other parts of the economy. The massive export economy props up the currency as well to the detriment of other exporting businesses.
When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain..
If you look at it from the perspective of a city like Houston, where a big chunk of the local economy is driven by the oil industry, you can see why it's a big problem for some people.
Time for some shale driller bailout planning. If it breaks OPEC it's good for everyone. The unholy amount of funding that supports global terrorism will take a big hit.
The price of gas is only partially due to the cost of oil. Taxes make up a pretty chunk of the cost of gas. On average $0.50/gal.[1]. Don't forget the cost of refining and transportation. This chart says 62% of the cost of gallon is due to crude oil costs[2]
So based on your $3.60/gal, $2.23/gal is oil. Reduce that by 40%, you get $1.33 and add back in the other stuff and I get $2.70/gal now.
Not all of the price of gasoline is derived from the price of crude oil. Some of the price is from taxes, transportation and refinery costs which have not changed. (The exact ratios vary depending on where you live).
But as someone said, crude oil prices reflect future retail prices. When you go to a gas station you get fuel that is weeks/months old, so it makes sense to pay the price that crude oil was selling at weeks/months ago.
Great point. 40% drop in oil prices vs. a 22% drop in gas prices. Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way.
There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there.
I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.
I'm admittedly naïve in this, but wouldn't it make financial sense to buy OPEC based oil stock in the coming few months? Based on whether this is true, of course - so... In theory naturally.
Why does the author keep saying "If OPEC doesn't interfere"? Is the author in favor of price-fixing? I thought all sane human beings understand that a monopoly controlling the price of something is bad.
That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.
I also read an article talking about how the Saudi's wanted to ruin Iran. And another one about how they want to ruin Russia. I feel like any simple explanation like that is probably wrong.
They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production.
However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.
stickperson|11 years ago
mikeyouse|11 years ago
When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain..
http://www.economist.com/blogs/economist-explains/2014/11/ec...
minimax|11 years ago
http://www.houstonchronicle.com/business/energy/article/As-o...
fargolime|11 years ago
giarc|11 years ago
Sven7|11 years ago
fffrad|11 years ago
- barrel price went from $100 to $60. That's $40 drop.
- Price went from $3.60 to $2.80 a gallon in my city. That's $0.80 only
I don't get it.
refurb|11 years ago
The price of gas is only partially due to the cost of oil. Taxes make up a pretty chunk of the cost of gas. On average $0.50/gal.[1]. Don't forget the cost of refining and transportation. This chart says 62% of the cost of gallon is due to crude oil costs[2]
So based on your $3.60/gal, $2.23/gal is oil. Reduce that by 40%, you get $1.33 and add back in the other stuff and I get $2.70/gal now.
Not far off huh?
[1]http://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States [2] http://www.eia.gov/petroleum/gasdiesel/
socalnate1|11 years ago
timeal|11 years ago
But as someone said, crude oil prices reflect future retail prices. When you go to a gas station you get fuel that is weeks/months old, so it makes sense to pay the price that crude oil was selling at weeks/months ago.
ibmthrowaway218|11 years ago
The cost of the raw crude oil is only part (but a significant part) of the pump price.
It's more 'fun' in the UK where fuel duty and other taxes (VAT) form the majority of the pump price:-
http://www.petrolprices.com/the-price-of-fuel.html
kyu|11 years ago
There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there.
I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.
jaddison|11 years ago
desdiv|11 years ago
_nullandnull_|11 years ago
tracker1|11 years ago
crpatino|11 years ago
Or maybe there are enough reserves, but they are in the long game and want to buy the foreign oil first... while the taking is good.
innguest|11 years ago
That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.
civilian|11 years ago
They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production.
http://www.economist.com/news/finance-and-economics/21635510...
However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.