Edvenson Consulting

Subject:  The Price of Oil (and Gas)

Perspective: Consumer, International Observer and Auditor

Style:  Article Review and Point of Comment

Americans think they have it bad now that the price of gas is creeping past $3.00 per gallon, and oil is now over $100 per barrel, although you might be glad you do not live in Norway, where gas is now upwards of 12 NOK per liter.  Given that 12 NOK was last valued at something over $2.00, and that there are  3.78 liters in a gallon, we are paying over $7.56 per gallon of gas.  Yikes!  Despite the fact that we are paying nearly 80% of this price as tax to the Norwegian government - and are one of the world's largest oil producers, not only is this scary, but here, in Norway, as a result, when the price changes, it changes by kroner at a time, arguably nothing like the tiny price-creep that occurs in the U.S. market.  No, when we pay more, we pay 80% more of that 'more' to the Norwegian government. 

Gas tax is, as we know, a user tax, not usually such a conceptually problematic approach, except when the government, despite this, avoids using it well, budgeting properly for health and social services, services that persons strapped by high gas taxes with few alternatives for travelling around affordably, must struggle with, both to pay for the gas and to get the services.  The Norwegian government calls this a democracy, but will not admit that a car in Norway is not, exactly, a luxury item.  No, that is why we pay twice as much for a car as elsewhere:  100% tax for the car, since having a car is a luxury, and then there is the price of the car.  Now, we are looking for an MRI machine - and that is hard to schedule as there are not enough of them.  But if you have slipped a disc in your neck, perhaps you do not mind waiting several weeks for an MRI, and diagnosis.  Meanwhile, they will prescribe for you...Ibuprofen.  If only Norway would drop some of the previous century's socialist philosophy and Jante law restrictions, and bring up service levels.  More on the Jante law soon, I promise.

Excuse me, I was on a tangent. 

I found William Pfaff's recent article on the price of oil truly interesting ("Paying for Virtual Oil," International Herald Tribune, Jan. 5, 2008).  It seems that, in recent years, the price of oil has been released from actual cost on the buying and selling market.  In 2006, according to Pfaff, the Mercantile Exchange "removed previous restrictions" on oil trading's "access to other energy markets."  This resulted, according to Pfaff, in removing oil from the list of products bought and sold by traders based on its actual value, and placing it on the table as the equivalent to the common poker chip.  It is thus we hear that what has driven the price of oil up over $100 per barrel recently is ... violence in Africa?   Pfaff suggests that nothing real had actually happened that affected the oil that was on its way to market at this time. And so what happened to the prices we paid at the pump for gas? If my memory is correct, they quickly spiked, and then stayed up.

Pfaff asks a real question I and others should enjoy answering, and I welcome concise comments in this area:  What is the actual cost of oil? 

The futures market has now gambled on its price, and they would like to make something off their wager? They do so by pulling out their fast winnings, dropping the Dow about now?  Does that appear traceable to oil revenue speculations resulting in quick winnings? Or traceable to non-related scary stories? Do they get to do that?  When the oil is mixed into other-product wagering environments, not just stocks but options markets, how much is the price of oil on the market still reflecting the real cost of extracting, processing and bringing it to market? 

According to Pfaff, we are paying for "virtual oil," an amazing concept, but one which, given how unhinged behavior seems the rule of thumb these days in corporate hallways, I would not doubt for a minute.   But what should the price of my Norwegian gas really be?  Minus the over-80% tax? 

We note that China's unquenchable thirst for oil is going to change the balance of power in the oil and gas equation:  they want it, and they can pay for it. Yet, the price equation seems out of kilter, based on my experience as a consumer. And so I want to know what internal controls are in place to assure that I am not overcharged, and that only a reasonable profit is made on the product.

I also note that, back in the 1980's, a handful of American recalcitrants suggested that the U.S. nationalize oil.  In that way, it was argued, it would become a public utility, in effect, without profit motives, and with the ability to enrich the country, for the benefit of present and future generations. 

When Putin moved on the BP and Amoco contracts with Russia's oil giants, he was moving to nationalize Russian oil, in part - to protect it for the benefit of Russians - by, and for Russians.

When we talk about oil in the U.S., we collapse in consternation, open our pocket-books, and exasperatingly provide unquestioned and limitless resources to for-profit corporations, companies whose goals are ... to obtain the most efficient and effective level of profits possible for themselves and their investors right now.

I enjoyed Pfaff's presentation of this topic for our consideration, and look forward to hearing and reading more on this question.