Who's Really to Blame for Rising Oil?

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Includes: DBO, DUG, OIL, USO, XLE
by: Jason Schwarz

This might be the worst kind of oil spill. The bubbly high price of oil has spilled over into food and the damage appears to be life threatening. Somalia is the latest to join the growing list of African countries where rising food prices have led to violence. A sack of rice that sold for $32 only one month ago is now going for $52. Over one billion Asians are requiring assistance to weather the effects of the soaring price of food around the globe. Haruhiko Kuroda, the Chinese bank's president, said an erosion of purchasing power has put Asia's poor at risk of hunger and malnutrition and could “seriously undermine the global fight against poverty and erode the gains of the past decades.”

Food prices have an extremely high dependence on oil and oil-based products. Food processing, storage and distribution are all extremely energy intensive processes. In order to curb food inflation, we first need to lower oil. World leaders have no control over pricing and don’t know what to do. The price of oil has become inelastic, it no longer reacts to increased supply. OPEC President Chakib Khelil recently announced that US gasoline reserves are at five year highs but prices continue up and up. If you watch the news, you will see commentators scratching their heads trying to explain the relentless phenomenon.

Allow me to enumerate the latest stream of excuses for high oil: supply shortage, investor speculation, terrorist activity, low dollar, Venezuela, China... it’s practically turned into a fad to try and come up with the explanation for high oil. All the while we turn our backs to the real reason. Oil continues to go up because it can. There it is, the cold, hard truth. Sellers don't dictate the bid, buyers do. Oil is simply moving towards its market value. The energy sector is finding the max price that consumers are willing to pay for a gallon of gasoline. Record profits of oil companies give them no incentive or evidence to halt gasoline price hikes. During 2007 the largest oil companies were bringing in an astounding $1,300 per second! If I were them I wouldn’t lower prices either.

Most analysts laughed when Goldman Sachs predicted two years ago that a barrel of crude would rise to $100. On Friday, crude reached a new high of $126. Oil prices have doubled in a year and risen six fold since 2002. Goldman’s oil gurus are out with a new forecast. They think we will see $150 a barrel this year and $200 a barrel next year. Scary. Paying $5 or $6 a gallon for gasoline will become common unless we do something about it. Food inflation will intensify. As for you and me...well, consumers will be stretched to the max. All our hard earned money will be sitting on the books of Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and Conoco Philips (NYSE:COP).

Consumers are raging mad so the question that needs to be asked is, what can I do about it? I can do nothing but we can. Imagine what would happen if we made the collective decision to dramatically decrease our gasoline consumption oil one week out of the month? A 20% reduction in demand would send shivers through the futures market and not only oil, but oil and food prices would slingshot back to historical norms. Are consumers able to organize themselves on such a grand scale? Are consumers willing to sacrifice? If consumers unite in conservation, we’ll be amazed how quickly the commodity bubble will burst.

Here are a few ways consumers can cut back on gasoline consumption:

  • carpool
  • combine errands and reduce trips to the store
  • choose leisure activities closer to home
  • use public transportation
  • sell your gas guzzler
  • avoid rush hour
  • avoid aggressive driving by obeying the speed limit
  • get a tune up to ensure efficiency

Stop debating about Chinese demand and the low dollar and all the other high oil rationale that we hear. Who’s really to blame? Take a look in the mirror. It’s time for consumer’s to walk the talk. Period.

Disclosure: Author has a long position in DUG