Oil's apologists point out that the oil companies make, on average, about 8% profits, about average for businesses generally, but then their gross has become so much larger, so their total profits have soared as well. Eight percent of $100 billion is $8 billion, for example, while 8% of $400 billion is $32 billion, so higher prices do lead to higher profits. Why is oil trading so high? Oil traders may be making most of the money in the oil business, and the oil countries. Headlines today that oil "fell sharply," may reassure, but oil only fell about $4, to just under $132 a barrel, a price that would have been unthinkable only six months ago.
Chavez, Ahmadinejad and the Saudi King are laughing all the way to the bank, although the Saudis apparently appreciate that high oil prices will likely lower consumption in developed countries; that's why they've called an OPEC meeting to increase output, but there may just not be the capacity to increase it enough.
Supply and demand really is part of the problem: the two largest countries in the world are engaged in the greatest boom, the fastest development in human history. The oil traders are simply trading on that, perhaps exaggerating the effect—for their own profits. So, China announces a price increase in fuels, but that will probably have even less effect than the price increases we've sustained. It's true our consumption has fallen somewhat, but not enough to drive oil down below $130, let alone down below $100.
Our falling dollar is another of the reasons why oil prices remain high, but there is a short-term reason as well—the summer Olympics in China. At least that was what one gas station owner told me. The Chinese know that their energy grid is unstable; they've been growing so rapidly that should be no surprise. So, they are apparently buying up a huge reserve of oil to insure that they don't run short when the influx for the summer games begins. And there's also need for fuel to carry out the reconstruction and aid after the earthquake. So, there are short-term reasons for the spike in prices, but it's the long-term ones that are most important.
The gas station owner insisted that he was actually making less with the high prices of gas, that his margin was actually lower with the higher gas prices. Why?
Have you noticed that you don't buy gas with cash as much as you used to? When it took only a $20 to fill your tank, you'd pay with cash, but now with gas around here at between $4.23 and $4.45, more people pay with credit cards. I know I do. The gas station owner confirmed that a larger percentage of his sales are now on cards.
So? Retailers pay over 10% of the purchase price when it's bought with a credit card, so that eats into the gas-station's margin, never very high to begin with (around 4-5%). Most gas stations are independent small businesses, so they're relatively powerless against the big oil companies, their suppliers.
It's likely, however, that as I noted in the beginning, it's the speculators who are making the greatest windfalls. They are not solely responsible for the run-up in prices, but they are the ones taking greatest advantage of it, and they are probably inducing prices to rise more dramatically.
Really, there is no solution to the rise in oil prices in the short-term. If speculation were stopped tomorrow, prices would still rise over the next year, not fall, because of the increased demand from so many new consumers in China and India—and because of the parlous state of our dollar.
The only solution is longer-term, and it isn't drilling in ANWR, or offshore the US coasts; those horrifically environmentally damaging "fixes" advocated by McCain and Bush would add a little oil in about ten years, but not enough, and not soon enough, but it would boost oil company profits down the line. The only solutions are increasing efficiency, lower energy use (through changes in transportation to mass transit, more insulation of buildings, smaller vehicles, bike friendly cities) and through the massive development of alternative sources of energy—wind, solar, and environmentally friendly bio-fuels (not from corn or palm oil).
We are only at the beginning of a post-oil age. There will have to be dramatic shifts in energy use, which will cause many other changes. For example, the whole expansion of suburban settlements will probably be reversed. Cities like LA and Atlanta, expanding outward endlessly, will simply become unsustainable in their present form. People will not be able to commute to work in single vehicles; they already are getting to the point where they can't afford it, yet our settlements are too dispersed for effective mass transit.
Our system of materials handling will have to undergo dramatic shifts as well. Shipping all our fresh food from California, Florida or even New Zealand and Argentina will become more and more expensive. Ditto all our manufactured products from China and elsewhere.
Transportation costs were hardly a factor when all these patterns were set. It was cheaper to produce in China and ship across the oceans, cheaper to live in New Jersey, or Glendale and commute great distances by car, but that is changing rapidly. Until and unless alternative energy becomes cheaper than oil was several years ago, and environmentally benign enough that it does not exacerbate global warming, our whole way of doing business, of living and of maintaining a "post-industrial" economy will have to be transformed dramatically.
Grow your own vegetables! Work from home if possible, buy locally and insulate your houses! Defund Defense and fund alternative energy, mass transit, and subsidized housing in decaying cities instead. That would be a true "Defense" policy. Oh, and build better levees, and resettle away from flood plains and fire hazards like the West's forests of chaparral.
The point is: we've got to face facts. Oil is unlikely to go down much in price, the dollar is unlikely to recover, and we can no longer afford the "American lifestyle," no matter what we do.