Blog#135- 11/4/22
WHY ARE FUEL PRICES SO HIGH?
By Richard Davis
I run a non-profit that provides a small amount of home heating fuel assistance to local people. The organization has been operating for almost 20 years. The reason we created the Windham County Heat Fund was to provide a short-term temporary fix to high fuel prices. We thought we would spend a year or two helping people and then move on.
Didn’t happen.
We deal with local fuel dealers on a nearly daily basis during the home heating season in New England so it seemed reasonable that we should try to understand why fuel prices are so high. After some research I still have no idea why fuel prices are so high. I do know that 125 gallons of oil in 2012 cost $216 and today costs over $700.
Here is some information I have gathered in an effort to understand fuel pricing. Making sense of it is another matter.
The United States is the largest net producer of crude oil followed by Saudi Arabia, Russia, Canada and China. It is clear that world events have a bearing on the flow of oil and the war in Ukraine and relations among countries has made oil pricing volatile.
Global warming has made it clear that the planet needs to rely less on fossil fuels and many countries, as well as individuals, are making an effort to move toward the use of renewable sources of energy such as wind and solar, as well as instituting measures to support work to make homes and other buildings more energy efficient. All of these measures help, but when the price of home heating oil is five to six dollars a gallon and gasoline is almost as costly, those efforts can feel meaningless.
In a sensible market the law of supply and demand would prevail. If demand increases or supply decreases then the price of a commodity should increase. If demand decreases or supply increases the price should decrease. But that is not what happens in the crude oil market.
There are so many middlemen in the process from oil extraction to home delivery that it is a miracle that that kind of supply chain doesn’t make the price of oil higher than it is. Instead of simple controls like supply and demand, there are a number of forces determining oil prices.
According to the website investopedia.com the price of oil is set in the futures market. Buyers sign a futures contract that is a binding agreement that gives someone the right to purchase a barrel of oil at a predefined price on a predefined date in the future. The buyer and seller are obligated to fulfill their part of the transaction at a specified date.
But even the futures market is not straightforward. There are two types of futures traders know as hedgers and speculators. Hedgers buy oil futures to guard against potential price increases. Speculators try to guess the direction of the price of oil but don’t buy the oil. Most futures are traded by speculators who never buy oil. Entities that physically buy the oil make up three percent of the futures market, according to investopedia.
All of this only muddies the water and, after reading this, I know less than when I started my research. Next, the power of OPEC has to be considered. Most sources note that OPEC, made up of 13 countries, may be the single biggest influencer of oil prices.
OPEC was created in the 1960’s to fix oil and gas prices by controlling production, providing greater profits for its members. OPEC controls over 70% of the world crude oil reserves and nearly 40% of world crude oil production. Current news stories make it clear that when OPEC cuts production oil prices worldwide go up. Perhaps this simplistic explanation is the most accurate way to look at oil prices.
According to the U.S. Energy Information Administration there a number of factors that cause oil prices to fluctuate. These include the fact that heating oil demand is seasonal, the cost of crude oil changes, competition in local markets varies and regional operating costs can vary.
What is clear is that no matter what we do as individuals we will have very little influence over the price of heating fuel.
We can decrease consumption, but when it costs $1000 to fill a tank with oil, the motivation to seal up a drafty house dwindles quickly.
Sadly, politicians and policymakers do not understand that the current market for home heating fuel has created a life and death situation. People will die all over the world this winter and all they are being offered is too little, too late. Surely world leaders have the ability to tackle the problem head on instead of nibbling at the edges.
Oil companies posting massive profits
What the U.S. Energy Information Administration doesn’t include in its list of factors is that oil companies are posting massive profits. They could produce more, which would drive prices down, that that isn’t what their shareholders want. PBS did a story about this a while back.
Environmentally, producing more oil isn’t a good thing and I think the US and other countries should be doing all in our power to transition to other forms of energy. But the failure of our government to do that shouldn’t be on the backs of people who are just scraping by and trying to keep warm in winter while the oil companies laugh all the way to the bank.