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May
08

Rising Oil Prices: Who’s to Blame?

Can anyone explain what exactly the deal with the ever rising oil prices is? I remember paying for gas at less than a dollar a gallon in the United States (2006). I also recall paying as low as PKR 30 (around 45 Dollar Cents) for a liter of petrol in Pakistan (2005). However, Pakistan is an entire different scenario. Inflation is at an all time high in Pakistan. Central bank’s discount rate is over 14%. And this is not something new for us. The dollar is continuously getting stronger, on average, in Pakistan. It has risen over one third of its exchange rate since 2008 (from PKR 60 to PKR 85). This means an increase of over 30% in the import bill of a country where the major import is oil. Therefore, any rise in oil prices across Pakistan can be justified in light of apparent reasons.

What doesn’t make sense is the constant price hike in the United States of America. The prices have quadrupled over the last few years. This is not an ordinary price hike for a nation where the average fuel consumption is over 1000 gallons per annum. The inflation rate is relatively low and the Fed’s discount rate has been below a 1% percent figure for over a year. The sales of automobiles have gone down. These are factors that should have contributed towards lower or stable domestic prices (in th US) for gas, not a hike.

The economy runs on oil. I am not referring to an oil powered economy like Houston. I am talking about every economy of the world. Every business systems make extensive use of oil as the primary fuel for logistics support. This means the entire economy is literally Running on gas. The effect of rising oil prices can be seen once you break down the value chains of a process.  For instance, Wal Mart acquires some of its products from Pakistan. Imagine the higher cost paid by the supplier in Pakistan due to high oil prices associated with producing and transporting these goods (also the increased electricity usage rates due to higher prices of furnace oil) and add to that the costs paid by the shipping company in acquiring fuel for its vessels. All these cost end up adding to the price paid by the final consumer like you and I. At the end of the day everything that was being sold for $2 a piece will end up being sold for $4.

We know that oil prices are set globally and the international oil prices have been fluctuating dramatically in the last few years. It won’t be wrong to say the recession was caused, in part, due to this fluctuation.  But what and who was causing that increase? The War on Terror alone is not the only culprit here. It is more than just obvious that some forces are in control of these international prices. The price rise internationally reflects in domestic prices. However, the price hikes in United States have been on the run. They do not seem to follow the leading indicator of international prices. Oil touched $120 earlier this year (2011). However, its back to below $100 a barrel now but this drop in price hasn’t made its way to the domestic market?

Oil prices are a great concern in the modern world’s way of life. An average American ends up utilizing at least 30 gallons a week. This translates into over 1000 gallons a year, a figure that represents thousands of dollars spent on the cost of transportation across the United States. That may not seem a lot but it translates into a huge figure once you estimate the multiplier and cumulative (value chain) effects of this change. With this pace, the prices will touch $10 a barrel within this decade.

Exxon's $11 Billion Profit (1st Quarter 2011)

Is this a question of “who” or a question of” what”? Whichever it is, something or someone is pulling the gas prices upwards. In my opinion, this is being made possible at the expense of the consumer through consumer exploitation. Why hasn’t anyone questioned the surging $11 Billion first quarter (2011) profit of Exxon? They are making super normal profits in an economy that is recovering from recession. Is it justified in the name of competitive business practices? Hell No!!!

The major factor that is contributing towards higher oil prices are the steps taken by President Obama, to reduce domestic oil production, including a moratorium on deep water drilling. This decision has been taken as a result of the BP spill and new regulations on the oil business. Its strange how the media refuses to cover this story. Despite being overturned by the federal court judge in June (2011), the deepwater drilling suspension is still being enforced. This is a contempt of court but no one seems to care.

Obama may have taken this step caring for the environment but he needs to understand that his plans are being carried out at the expense of very high gas prices for consumers. It would have been much better on his part if he had done something to regulate profits of oil giants like Exxon instead. The benefit would’ve passed on to his people.

Wrong move Mr. President, wrong move…

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