World Oil Prices - Who Really Sets World Oil Prices?

I watched the CBS News show "60 Minutes" Sunday night, and saw the piece on world oil prices done by Steve Croft. I realize that their format doesn't allow for a detailed, in-depth investigation of any topic, but this seemed to be a broad-brushed finger pointing session.

Have you ever watched a skilled magician do his act? He will divert your attention with activity in one hand, and do the "magic" with the other hand. That's what this segment reminded me of.

Croft and his gaggle of "experts" led viewers to believe that the commodity speculators were entirely to blame for the spike in oil prices in 2008, and also responsible for its collapse in the last quarter of 2008.

But is Croft telling the truth?

Maybe. But only partially, in my opinion.

World oil prices are set on two criteria, or two particular oil products; West Texas Intermediate Crude (Sweet Crude), and North Sea (Brent Crude). Those prices are set in New York and in London, not by the oil producing nations of OPEC.

West Texas Sweet comes from the oldest major producing fields on the planet. North Sea Brent comes from the most difficult and highest cost oil field on the planet. So, world oil prices are set based upon the two places on earth where the production cost is highest.

There are places where oil is plentiful and easy to produce. It's almost like sticking a pipe into the sand and oil comes out. The production costs for those kinds of oil fields is much lower than in the North Sea, so those oil fields are much more profitable.

But do you ever hear anyone telling you that? No. What you hear on all the news shows and from government jabberers is that OPEC has the rest of the world in its clutches.

Next point to challenge is the blaming of the speculators. In any transaction, there is a buyer and a seller. Both parties are making their best effort to profit from the transaction. When someone buys a future contract on a commodity like oil, they are betting that either the price will rise or that the price will fall before a certain future date. Buyer and seller are both gambling, and one will be right.

So who are the speculators? I don't know. But the major commodity exchanges are in New York and London. There are speculators buying and selling in every single commodity, from bacon to frozen orange concentrate to crude oil. Curious that no one is crying about speculation in the other commodity markets.

My business is as a Claims Consultant and a Risk Manager. It seems to me that commodities futures contracts are very similar to buying insurance to protect against certain losses. Skilled insurers make a profit, and unskilled insurers lose money. No different here in the oil business.

Remember also that during the same time period, the US Treasury and Federal Reserve flooded the world with trillions of new dollars, causing inflation everywhere. You did notice that prices for nearly everything escalated in 2008, didn't you?

Finally, in an oil-related story, Georgia state government regulators recently assessed fines against about a dozen gas stations that allegedly did "price gouging" during the run-up on oil prices in 2008. That must mean that property rights in the State of Georgia don't mean anything. A merchant who spends HIS OWN MONEY to buy a product should be free to sell that product to whomever he chooses for whatever price buyer and seller can agree to. No one forced any buyer to buy gas from these stations at any price. The sellers offered their product and willing buyers bought it. However, seems that some of those buyers like Fascism more than Capitalism, since they called the State bullies and complained. I hope that the stations marked for punishment are fighting back in the courts.

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Texas Considers Alternative Fuels In The Face of Oil Prices - A Run-Down of Choices

The dramatic rise in oil prices over the past few years has generated a lot of attention for alternative fuels and alternatively powered vehicles. Environmentalists hail it as the beginning of a revolution and a natural consequence of using non-renewable resources with abandon. The public health benefits that would result from a major increase in those using alternative fuels is almost immeasurable. Even Texas, second only to Alaska in the amount of oil produced per year, has biodiesel stations in Austin, Houston, Dallas, and many other parts of the state.

All the major car manufacturers are coming out with hybrid models, and prototypes are in the works for an American release of a mass-produced, plug-in electric hybrid vehicle as early as 2009. These models promise up to 150 miles per gallon, and that's just the beginning of what this technology can do. More and more Americans are planning to buy an alternatively- fueled vehicle as their next car or truck.

While sticker prices for these alternative vehicles is currently higher than their conventional petroleum-based counterparts, manufacturers claim long-term savings in fuel costs and reduced environmental impact. Price will also most likely go down in the future due to economies of scale. Logically, then, public health stands to improve as their usage increases and fuel emissions decrease, making most of us -- from the single students at Texas A & M, to health insurance company executives -- look forward to the change.

Now, telling all of these alternative fuels apart is an altogether different challenge. "What exactly is biodiesel again?" And, "I know hybrids are supposed to be a good thing, but...er, what are they?" To make life a little saner, here is a basic run-down of the most popular current and upcoming technologies:

Hybrid Vehicles

Technically, a hybrid vehicle is simply one "using two or more different types of devices for propulsion." This can be as simple as a sailboat with an onboard motor, wind is used when available, and a petroleum fuel-powered motor, or otherwise-powered engine, when it is not. Hybrid vehicles use the same idea, only with a more complicated technology.

A variety of drivetrains are possible with hybrid vehicles, but those currently on the market are usually hybrid electric, such as the Toyota Prius, Toyota Camry Hybrid, Ford Escape Hybrid, and the Honda Insight. These use internal combustion engines powered by petroleum fuels (such as gasoline or diesel), combined with rechargeable electric batteries to power electric motors. Most major cities across the U.S., including Dallas, Houston, and Austin, have thousands of hybrids already on the road.

The idea behind these hybrids is that the internal combustion engine can switch to an electric motor when the conditions are right. The greatest advantage over conventional vehicles is the better in-city gas mileage. Most of these models, however, use a fairly inefficient internal-combustion engine -- and petroleum-based fuels -- while on the highway, like any other conventional vehicle.

Some vehicles currently marketed as hybrids are not actually hybrids at all, such as the Chevrolet Silverado Hybrid pickup truck, which uses a conventional, oversized starter motor in which the engine turns off while the car is coasting, braking, or at a stop. The motor then restarts quickly. This process can save up to 10% in fuel, but this is a low percentage in comparison to other hybrid models. If searching for a hybrid, the best thing to do is look closely at fuel efficiency and environmental impact.

Hybrid models have actually been in use for some time. Trolley buses, for instance, are hybrids. They switch between on-board diesel engines and overhead electric power sources. Many mass transportation companies are also using a mixture of alternative power sources and bio fuel additives to run their fleets.

Other types of hybrids include flexible-fuel vehicles, which use a mixture of input fuels in one tank, usually petroleum-based and biodiesel. Gas and bioethanol is a common flexible-fuel combination, as is diesel and biodiesel. Plug-in hybrid electric vehicles (PHEV) use a combination of traditional fuels and electric power.

Electric Vehicles:

These are not always technically distinguishable from hybrid models, as most electrically powered vehicles have a back-up system that runs on petroleum-based, biodiesel, or ethanol fuels. For the purpose of clarity, however, the term "electric vehicles" here refers to those vehicles that run primarily on electric power.

While small numbers of electric vehicles have been used for quite some time, and while hybrid conversion models are available, mass-produced models are expected to be released within the next few years. The most common model under prototype is the PEV, or the "plug-in electric vehicle," also referred to as a "grid-connected hybrid." They are much what they sound like -- vehicles that are literally plugged into an outlet to recharge the batteries on which they run. The main difference between PEVs and PHEVs is in the ratio of electricity to fuel used to power the engines. Urban areas known for their environmental policies, such as Davis, California, have had power stations for electric vehicles in place for several years already.

Electric vehicles reduce air pollution, dependence on oil, emit fewer greenhouse gases, and increase national energy security. An all-electric operation in California would reduce fuel costs by three-quarters.

Ethanol:

Ethanol, or grain alcohol, has come into the spotlight in recent years due to the increasing volume of corn ethanol produced in the U.S. While there is some controversy over the use of corn ethanol -- the unimpressive EROEI, or energy returned on energy invested, and the inability for the country to produce enough of the product to supply demand -- the idea is that of a clean-burning fuel made from renewable resources.

Brazil has taken this concept to new levels. Ethanol made from sugarcane is the largest national fuel industry of that country, and all gas distributed there must be at least 20% ethanol. Half of all cars in Brazil are able to use 100% ethanol as fuel, which includes vehicles with ethanol-onlyand flexible-fuel engines.

Efficient sugarcane processing made this possible. With 30% more sucrose than corn, sugarcane ethanol is not only more efficient, but much easier to extract. The biomass waste from the plant, "bagasse," is then used as fuel in electric power plants.

Biodiesel

Biodiesels are "alkyl esters made from the transesterification" of vegetable oils or animal fats. In laymen's terms, biodiesels are processed, organic oils to be used as fuels.

Biodiesel is, perhaps, the most promising alternative fuel available today. It can be made from any number of vegetable oils, used in most modern diesel engines without modifying them, is biodegradable and non-toxic, wears less on the engine than conventional diesel, and "produces 60% less net carbon dioxide emissions than petroleum-based diesel because it, itself is produced from atmospheric carbon dioxide" via plant photosynthesis. Consumers have reported up to 70 miles per gallon, and, if you learn how to process waste oils yourself, it's virtually free.

The fuel can be purchased at select stations, even in big oil states like Texas, though it is generally a bit more expensive than conventional diesel. This will likely change, however, as demand increases. German fuel stations customarily have a biodiesel option, and as the fuel is so popular there, it's actually cheaper than petroleum-based diesel.

It almost seems too good to be true. The problem? Most passenger vehicles in this country don't use diesel engines. With increased awareness, however, this problem could be quickly solved.

Mass-produced, alternatively fueled vehicles are an exciting delivery of technology. Particularly with the price of petroleum-based products skyrocketing, it's a welcome change for consumers and environmentalists alike. The positive effect on public health and the environment, and the reduction in dependence on foreign sources of oil could literally change the face of energy consumption, as well as the future of domestic and international relations. Our biggest responsibility as citizens then, is to educate ourselves and take advantage of these opportunities -- both for our own health, and for the health of future generations.

Alternative fuels can have a positive effect on both our own, and on public health. Being aware of your health, and what you can do to safeguard it will certainly affect you as you age, and eventually your wallet as well.

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