We watched as oil prices surged by $50 per barrel between January and August, and then fell by $90 since. It would be a great holiday gift if the current prices at the pump would last. But hold on to your wallet, because they won't.
We traditionally believe commodity prices are established as a result of supply and demand. In this case the theory does not apply. Why? Well, world consumption has not decreased since August -- it has remained flat; and supply has certainly not increased. So why is the price at the pump in New Jersey and other areas around the nation below $1.70 a gallon?
First, it is important to understand what caused the recent spike to more than $4 per gallon. The Organization of Petroleum Exporting Countries (OPEC), which pays less than $10 per barrel to get crude out of the ground and controls more than 70 percent of the world's oil reserves, implemented two policies: first, OPEC conspired to constrain oil supply even as world consumption rose; and second, OPEC members gave no indication at what price they would begin increasing oil supply.
Their policies fueled the price surge because buyers (investors) looked to future demand increases and expected they would continue to run up against about the same supply. Consequently, buyers accelerated their bidding for oil, and other investors who observed the opportunity for future price increases piled on. Today, however, the worldwide economic slowdown has reversed investors' expectations for the future. Demand forecasts have been revised significantly downward. Future increases in oil demand that had been anticipated therefore have reversed, relieving the price pressure for now. Hence gas prices are under $1.70.
While the price of crude oil today hovers around $50 per barrel, the Associated Press reports the Saudi Arabian government believes the price should be raised to $75 per barrel: "Saudi Oil Minister Ali Naimi said that the Organization of Petroleum Exporting Countries will do what needs to be done to shore up falling oil prices when the group meets Dec. 17 in Algeria." So it appears OPEC will continue to try and rig prices vastly higher than we see today - despite the global financial turmoil and economic slowdown. How? By pumping less and reducing supply.
The oil market could be an extremely stable market with few fluctuations were it not for OPEC's greed. OPEC's large oil reserves are accessible with relative ease. The Persian Gulf members alone hold 737 billion barrels of proven oil reserves, 55 percent of the world's total. Since 2004, the cartel has had plenty of time to add pumping capacity, particularly in the Persian Gulf. Yet, in all the Persian Gulf OPEC member countries combined, there are fewer oil-producing wells than in the lone country of Brazil, which has 11,995 as compared to the Gulf countries' 7,618. That's right, in spite of having 55 percent of the world's known oil reserves, they have fewer oil wells than just one country, Brazil.
Had OPEC committed to meet increases in demand while working to bring new capacity on line, the enormous price spike would not have occurred. OPEC did not act because it wanted to probe how much more it could charge.
It would be a mistake to think OPEC had become irrelevant because of the moderation in prices we currently pay. OPEC has shown a clear intent to manipulate future prices by controlling supply. Those who think OPEC's insatiable appetite for huge profits has diminished need simply look at recent history.
Enjoy lower gas prices now -- they probably won't last. OPEC plotters won't allow it. To fight the near-certain higher gasoline prices of tomorrow, we need to plan to increase supply of our own domestic energy sources today. That means responsible drilling or mining for U.S. oil, coal and natural gas, building modern nuclear power plants, and developing more solar, wind and alternative energy sources.
Jim Saxton, a New Jersey member of the House of Representatives, is ranking Republican on the House and Senate Joint Economic Committee and was chairman of the committee in 1997-98, 2001-02, 2005-06. He has served in Congress since 1984.