In recent days the primary response to the higher gasoline prices is to tap into the US and European oil reserves. While this may satisfy the political need to seem like someone did something, it is the wrong answer to the underlying problem. The problem is not a lack of oil. The problem is a lack of refineries.
In theory and practice, when more oil is produced, the spot price per barrel should decrease. This is supply and demand in action, and it holds true if all other things in the market are equal. Despite this economic truth, why do Saudia Arabian and oother OPEC members' efforts to increase oil production seem to have no impact on the per barrel spot price? One explanation is that Asia's emerging markets chug everyone else's oil. While that may be part of the problem, the other puzzle piece is stagnant global refinery capacity.
The 1970s OPEC oil embargo was an entirely different scenario than the current situation, but the results are the same: Very high gasoline prices and threats of fuel rationing. Many differences divide the OPEC embargo and Hurricane Katrina's wreckage left at seven of the Gulf Coast's nine refineries. The main difference materialized long before Hurricane Katrina formed. The US built its last refinery more than twenty-five years ago. It was built to increase refinery capacity i response to the OPEC embargo. Now that decision's consequences are quite obvious to anyone who spent a substantial amount of time waiting in gasoline lines observed price rises of at least $0.30 per gallon within the span of a few hours.
The oil-producing countries can increase production as much as they like, but without enough refineries to convert that crude into usable fuel, the result is dumping a useless commodity on the market. Hence no great alteration in the spot price per barrel. Elected officials who say they will tap the oil reserves and that will lower the price at the pump want the "feel-good effect". They also demonstrate they do not understand the dynamics that are at work in the commodities markets.
Commodities transactions occur in the forms of futures contracts, derivatives, and various precise "puts" and "calls". In very simplified terms, commodities markets are like risky, high-stakes legalized gambling. For example, airlines purchase fuel six months in advance. This locks them into a particular futures contract based on projections of what they think the oil price will be at that time. This calculation takes account of currency shifts, market variations, output fluctuations, and forward looking statements by the oil companies. Sometimes commodities traders make very good guesses. Sometimes they make very bad guesses. If a trader makes a series of good guesses, it may seem the market functions as a kind of money pump. If a trader makes a bad guess, it can be the end of a company or a conglomerate.
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