Thursday, June 26, 2008

Oil- Why it's so Expensive

If this sounds dry, basic, and like I'm rambling on, I'm sorry...I'll try to make it interesting. I want to sort of give a short lesson (for lack of a better term) on economics to make this issue make more sense.

Many people refer to the "oil companies" and the "government" as if they are two entities in total agreement and character. I'd like to point out that "oil companies" is plural, and that "government" is made up of tons of disagreeing people. There are many oil companies (Shell, Chevron, Lukoil, Mobile, Exxon, etc.) and many political ideologies in Washington (Liberals, Conservatives, Moderates, Libertarians, Socialists, etc.). Now then, you're probably wondering why I established these two facts. Well simply, it's to tell you this. Both the oil companies, and the government are in constant competition. The oil companies are competing for your money, and the government is competing for your approval (and votes). So therefore there isn't one entity referred to as "oil companies." Rather, there are many different oil companies at war with each other for your money. Why would they be after your money you might ask? Well, plain and simply they want to make a profit. That is the goal of any company. Therefore, in an effort to make a profit, oil companies attempt to attract you, the customer. How do they do this? They run commercials, they post signs, and they most importantly offer you a lower price then their competitors. At the same time, other companies are doing the same thing. This results in the lowest price a company can get away with, while still making a profit, the price you pay. Now lets go back to the government for a minute. . . The government is also looking for a profit too. Therefore they tax the oil companies. This makes it harder for the companies to make a profit, thus they shift the price onto the customer. Therefore the customer has to pay extra in order to achieve the same quantity of a product. The government taxes all the oil companies equally, therefore competition is still alive, and no company is favored over another. Now then, a realization that must be established in the midst of all of this is the fact that we live in a world of limited resources. Oil is no exception. Oil becomes limited when more people use it, because there is more being consumed, and therefore less available. When third world countries become industrialized, they demand oil. A higher demand requires a higher price. (Hypothetical example: China demands oil so much, that it is willing to pay more for it then the U.S. is. The oil companies want a profit, so they go to China and sell their oil. In the meantime the U.S. still needs oil, so the price is jacked up to meet the price of China. When other countries get added to the mix, the price can become a lot higher.) Now then, part of the reason oil is so expensive is transportation (it costs money to get here), the demand for the oil (what other buyers are paying), and the taxes on the oil companies (what the government imposes). If we could drill for oil off the coast of the gulf of Mexico and in Alaska, as well as convert coal to oil, we would drop the price because two factors would be changed. The transportation of the oil would reduce, and the demand for the oil would reduce because more would be available. The only thing that would still keep the price the same way is the government, if they decided to increase taxes. Therefore, once again, mistrust should be against those in Washington who tax, rather then the oil companies who simply are trying to make a profit for whatever price you're willing to pay. As for the global warming issue....Maybe I'll tackle that another time.

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