Oil & Gas: Why Do They Cost So Much?

     There are many factors that effect the price of oil and gas in the United States.  The main reasons are; supply, demand, supposed scarcity, government policy, and investors.  Each one of these will be dealt with briefly, and hopefully after reading this article the reader will have a better idea of why they pay so much.

     In a perfectly free market, supply and demand would be the only factors in determining the price, but unfortunately the United States is NOT a free market economy.  The main argument for the higher prices of oil is its scarcity.  Many scientist believe that oil is the byproduct of decomposing dinosaurs and plants, and thus there can only be so much in the ground.  That is also why oil companies only drill 3-6,000 feet in order to search for oil.  Recently, Russian scientist have determined that oil is a-biotic and not from a living source, and therefor a natural byproduct of the earth.  With this information they began to drill to depths of 12,000 feet and discovered huge reserves of oil and natural gas.  This discovery has changed Russia from a net importer of oil to the second largest exporter in the world.  It is evident from this new information that the scarcity reasoning is flawed to a certain extent.

     Another reason for the rise in oil prices is our governments policies.  First, the Administration has prevented drilling in many oil rich areas in our country, and without this expansion in supply, prices will continue to stay high.  The most important policy failure of the government that hurts Americans at the pump is its monetary and fiscal policies.  When our government continues to overspend and print money as it has it devalues the American dollar.  Why does this matter?  When we go to Saudi Arabia to buy a barrel of oil for the previous amount of $90 they will refuse because the $90 dollars paid this month is not worth the same as the month before.  Now they want $95!  So the more we weaken the dollar, the more we will pay at the pump.

     Lastly, investors have a huge impact on the price of the commodity.  When oil hit prices over $140 a barrel, it was found that 95% of oil contracts were help by 6 non-oil using firms.  They used the idea of scarcity and demand to drive up the price of oil while they bought the rising contracts.  When the market finally began to work and the bubble burst companies like AIG, Lehman Brothers, and other investment banks were left with $140 a barrel contracts with no one willing to pay.  The result was a major part of the financial meltdown (It wasn't just the housing market).  Some of these companies were allowed to borrow $70 dollars for every $1 they had in assets, thus creating a huge risk for the investors.

     The reality for us common consumers is that we are at the mercy of Big Oil, Big Government, and Big Investment Banks.  So when you hear about reasons on the news just remember this article so you don't buy their lies.

Jeffrey Brandon Lee