Oil Wars

In Tuesday’s edition of the Wall Street Journal they had more information on the price of oil and gasoline compared to previous periods of history. Remember that this is an important discussion because the Venezuelan opposition has consistently argued that the price of oil is too high and that will make consumers of oil cut back and switch to other energy sources (personally I think one of the dirty little secrets of the opposition is that they secretly hope for oil prices to crash so they can drive Chavez from power – again the vendepatrias are willing to screw their own country to regain their former power and privalege). Some even within OPEC, namely the Saudi’s, have asserted that the price is too high and production should be increased to try to lower it.

Venezuela, however, is saying that the price is not too high and that the old $22 to $28 price band for oil should be shifted up to at least $40 per barrel if not higher. So who is right – is oil spiking to high price levels by historical standards thus risking a shift away from oil usage or does it continue to be moderately priced thereby not affecting consumption? Lets see if the WSJ information sheds any light on this.

First they gave a little chart of in the increase of price of different consumer items in the U.S. between 1984 and 2005. Seeing as I still can’t make charts (and sorry, this post doesn’t lend itself to any intriguing pictures) I will just list the price increases:

Tuition, School Fees, & Child Care: +320%

Medical Care +218%

Rent +114%

Public Transport +108%

Car repair/maintenance +103.5%

Housing 93%

Food 88.7%

Gasoline 66.8%

All Items 92%

So one can see that even with the recent run up in oil and gas prices gasoline has increased much less than other major expenses that families have and has increased significantly less than the average price increase for all items. So in real terms, gasoline is still cheaper than it was 20 years ago by a wide margin.

Then the article contained this price comparison:

Nick Cacchione, co-director of research at John S. Herold Inc., a Houston-based consulting company, says gasoline is a “bargain liquid” – 10% less costly than bottled water, one-third the cost of milk, one-fifth the cost of beer and less than 2% the cost of Jack Daniel’s whiskey.

That gasoline is cheaper than bottled water is quite telling. Last time I checked they didn’t need to drill deep sea wells and construct expensive refineries to make bottled water yet it still costs more than gasoline – and people willingly buy lots of it!! Maybe Venezuela should argue the new OPEC price band should be set between the price of beer and Jack Daniel’s – I’m sure the Saudis will love that!

Anyways, the proof of the pudding in terms of whether or not prices are too high would be if consumption was starting to slacken. Yet from the WSJ article we have this:

This year, the U.S. and China are expected to account for more than 40% of the 1.8 million-barrel-a-day growth in world demand of oil to 84.3 million barrels a day, according to the IEA. “There is absolutely no sign of flagging oil demand in the U.S.,” Barclays Capital noted in a review last week. “Indeed, oil-demand growth is actually speeding up,” the review said, noting that the U.S. government data for early June showed gasoline demand at a level never before seen in any month.

So not only is demand of oil not slackening it is actually accelerating in its increase. This is the most definitive indication that oil is not overpriced, even at nearly $60 per barrel.

So the facts we have seen here are that gasoline has increased much less in price than almost all other consumer items, it is cheaper than other liquids such as beer, milk, and even bottled water, and demand for it keeps increasing. This strongly indicates that Chavez is right, that current oil prices are NOT too high, and that the naysayers within both the opposition and OPEC are wrong. Once again, when examined, the facts line up behind Chavez. Why am I not surprised?
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