The Price of Oil

As oil prices start to hit new nominal price records, I thought I would do a quick run through on what I think is driving the price of oil and refined petroleum products:

1. Demand is growing faster than supply, this is the key piece of the story, the fact that under most possible scenarios will continue.

"The answer is that, in the short term at least, the cartel seems to have lost control over the market. With the exception of Saudi Arabia, its producers are pumping as much as they can—and Saudi excess capacity is in heavy crude that is harder to refine into the cleaner fuels demanded by rich countries. OPEC made a great show of raising its members’ combined quotas to 28m barrels per day (bpd) in June. But thanks to rampant cheating, they were already pumping at least that much, and possibly as much as 30m bpd, making OPEC’s promises little more than a carefully staged bit of public relations." -The Economist

2. Refineries are already running at capacity, no new refineries have been built in the US since 1973. Refineries in the US are getting older, and requiring more maintenance every day.

"Refining capacity is tight, with refineries running at 95.8% of capacity as of the end of last month. Any sizable outage almost immediately pushes up prices of refined petroleum products such as gasoline and diesel fuel, both at the refinery front gate and on commodity trading floors. Those higher prices, in turn, give refiners even more incentive to process more oil. So refiners bid up the price of light, sweet crude, the easiest grade of oil to refine and the main type for which refiners have excess capacity these days." -WSJ

3. Tight Pipeline capacity. Once products are refined they must be transported, there seems to be anecdotal evidence emerging that pipeline capacity in parts of the nation are tight, good news if you own a pipeline, bad news if you have to pay for whatever comes out of that pipeline.

""It's really starting to surface as an issue," said James Holland, vice president of logistics at Kinder Morgan Energy Partners LP, a Houston-based pipeline operator.

What started as routine supply tightness in these markets quickly snowballed following disruptive events that included a hurricane, a canceled fuel shipment and the airlines' own efforts to prevent shortages, the officials said.

Glenn Hipp, director of fuel purchasing and inventory management at Dallas-based Southwest Airlines, said late July and early August were "unprecedented for Southwest for the number of cities where we've had to manage supply problems."" -WSJ

4. We can't quickly solve any of these three. Take a minute and seriously think about it, could you cut your oil usage by 20% this week? next month? in 2006? Will the Chinese? I drive a lot for work and school, I could quit my job, I could quit my MBA program or sell my house, but if I don't do one of those, I can barley budge the amount of gas I use, and I suspect that is true for most Americans.

How long do you think it takes to build a new refinery, a new pipeline, a new deep water rig? I don't know exactly, but you measure that time in years, not months.

Timothy Burger
timothyb(at)timothyburger.com

It's Not a Science Gap (Yet)

Robert Samuelson has a good article in the Washington Post today that deals with the issue of the US's rapidly declining scientific advantage.

"As late as 1975, the United States graduated more engineering and scientific PhDs than Europe and more than three times as many as all of Asia, reports Harvard University economist Richard Freeman in a recent paper. No more. The European Union now graduates about 50 percent more, and Asia is slightly ahead of us. By Freeman's estimates, China has reached almost half the U.S. total and will easily overtake us by 2010. Among engineers with bachelor's degrees, the gaps are already huge. In 2001 China graduated 220,000 engineers, against about 60,000 for the United States, the National Science Foundation reports."

Samuelson rightly points out that the US has structural advantages that make our scientific discoveries more valuable than discoveries made in other nations. Samuelson is more optimistic than I am about this issue.

Like many things, in the past 15 or so years many nations have moved towards free markets and the protection of intellectual property, once again other nations are starting to do the things that gave the US a competitive edge and sustained higher wages in the US.

"We must be doing something right. Our decentralized research and development system (corporate, government and university laboratories, venture capitalists, and freelance inventors) excels at moving ideas to market and constantly reinvents itself. Here's an example: In 1980 Congress passed the Bayh-Dole Act to encourage universities to license discoveries to companies. It worked. In 2002 universities earned $915 million from licensing fees, almost four times the 1993 level, according to economists Richard Jensen and Celestine Chukumba of Notre Dame."

Timothy Burger
timothyb(at)timothyburger.com

Kansas Schools Improving

There are fewer failing schools in Kansas this year than there were last year. Undoubtedly a very good thing. This year only 15 failing schools, down from 21 last year and 30 the year before, a failing school has to meet state standards for two years before they are taken off the list.

Interesting that a state with 1400 schools can have only 15 failing schools and still not provide a suitable education. Interesting that school districts can claim that state isn't adequately funding a suitable education when they don't have any failing schools in their district.

However, education funding remains a mess in Kansas. Attorney General Kline and state Senator Vratil are proposing that Kansas lower the standards it sets for our students. This is the disastrous intervention of the courts into education funding.

The basic idea is set a lower standard, meet the standard, and keep control of schools with parents and legislators instead of courts. However I doubt the success of the plan. The court has already created its own standard that had no previous grounding in law, I don't see what would prevent the court from deciding the new standard isn't suitable, or just disregarding any legal standard and creating a new standard.

There is little that is more important than providing an excellent education to our children. Lowering standards sends the wrong message to everyone. If we really want to keep courts within their appropriate boundaries, we should amend the constitution to keep them within those boundaries, we should cure the disease instead of treating the symptoms.

Timothy Burger

Hitchens on Iraq

Christopher Hitchens is one of those people who genuinely speaks his mind. Hitchens, is one of the few writers you can count on to give a well reasoned, honest critique of a situation without getting the feeling that he has to defend his "side."

Today Hitchens has a very good article about the reconstruction of Iraq where he asks if we can really afford to take sides on this one instead of focusing on getting the job done:

"How can so many people watch this as if they were spectators, handicapping and rating the successes and failures from some imagined position of neutrality? Do they suppose that a defeat in Iraq would be a defeat only for the Bush administration? The United States is awash in human rights groups, feminist organizations, ecological foundations, and committees for the rights of minorities. How come there is not a huge voluntary effort to help and to publicize the efforts to find the hundreds of thousands of "missing" Iraqis, to support Iraqi women's battle against fundamentalists, to assist in the recuperation of the marsh Arab wetlands, and to underwrite the struggle of the Kurds, the largest stateless people in the Middle East? Is Abu Ghraib really the only subject that interests our humanitarians?"

Timothy Burger