Professor Sherry Jarrell Says OPEC Monopoly and Growing World Demand are Behind Gas Price Hike

3.4.2012 Article, Faculty News, General

Who should get the blame for spiraling gas prices?
Reposted from Asheville Citizen-Times | by John Boyle

Trying to get oil experts to agree on the cause of soaring oil prices is about as easy these days as trying to pump a single penny’s worth of gas to even out your purchase.

As the proud owner of a ‘96 Saturn with a salvage title, I’ve become acutely aware in recent weeks that the value of the gas in my vehicle far outpaces the vehicle itself. On Friday, it averaged $3.76 a gallon, 38 cents higher than a year before.

So, why is gas getting more and more expensive? Is it corporate greed? OPEC sticking it to us? Irresponsible monetary policy that creates a weakened dollar? Political tensions? Speculation?
I took it to a smattering of experts. Naturally, the answer to all of the above is "all of the above."

Here’s a synopsis of each expert and their thoughts:
Sherry Jarrell, professor of finance and economics at Wake Forest University.

"I'm kind of surprised that anybody is surprised," she said. "You have a monopolized supply of a scarce good with growing world demand, and it's springtime."

"People get out more and travel more, and refineries are converting from home heating oil back to gasoline, so there’s a temporary reduction in availability of the supply crude as they do that switchover. Imagine where gas prices would be if the U.S. economy were growing"

"We should think of ourselves as puppets on a string — OPEC pulls the string, gas prices go up. They’re a monopoly. They raise prices because they can."

A weak dollar and speculation play minor roles in soaring prices, she said, suggesting that more domestic drilling will help boost supply.

Shawkat Hammoudeh, professor at Drexel University's LeBow College of Business.

He's more of a "politics to blame”"man, stating we have "no fundamental reason for the prices of oil and gas to go up this much."

"If you look at the inventories for oil and gas in the U.S., they are near the upper limit of the five-year average, so the supply side is very good," Hammoudeh said. "And the demand side for gasoline has been going down in the U.S."

Yep, we've been driving less, he said, with the country tallying 3 trillion miles last year, about 100 billion less than the previous year. Secondly, we're driving more fuel-efficient cars, the economy remains weak and unemployment high.

So what is causing it to be more expensive?

He cited four components that go into the price of oil: the production cost of extraction and refining, the OPEC cartel setting and adjusting prices, the cost of depletion because this is an exhaustible resource, and…drum roll…

"The last factor is the fear factor," he said. "The fear factor is very volatile. This is influenced by natural crises, disasters, and it’s influenced by geopolitics. The most influential part of that right now is the geopolitical — the tension with Iran."

The U.S. doesn’t want Iran to develop nukes, and Israel is rattling its saber, intimating an attack. Iran has threatened to shut down the Straits of Hormuz, through which much of the world’s oil flows.

And the price goes up and up.

Albert Lu, managing director and chief portfolio manager of WB Advisors, a registered financial adviser and precious metals dealer in Houston.

In a nutshell, Lu says tension in the Middle East may contribute to rising prices, but "the primary cause of the steady increase is monetary inflation — central banks creating new money."

Why do prices of most things, including gas, steadily climb?
"The answer is because money responds to the forces of supply and demand in the same way other goods do. When the supply of money increases, its relative value drops – in other words, prices increase," Lu said.

The new money targets one segment first, typically — say housing — but eventually seeps into all segments.

"Businesses often celebrate these inflationary stimuli because they boost top-line revenues," Lu said. "However, eventually this same inflation works its way through the economy and shows up in costs as well — for instance in higher oil prices. So, when businesses blame high oil prices for poor earnings they neglect to mention, or don’t realize, that the inflation that is responsible for the higher oil price probably boosted their earnings results in previous quarters."

Get it? OK, me either.

And yes, the U.S. is "the primary driver of inflation around the world."

John Boyle, columnist, self-proclaimed know-it-all and loudmouth who talks to experts a lot.

I desperately want to blame oil companies, who do indeed make
billions in profits and keep reporting record profits. And OPEC obviously is squeezing as much money out of the world as it can. Speculators make me crazy, too, jumping up the price whenever they can. And yes, during the financial crisis we created money like we were playing Monopoly. And government definitely jumps in there for its slice, spiking the price even more.

So I give them all a dab of blame.

But I put most of it on me. And you, and everybody else who's become absolutely dependent on cars for our survival. They’ve got us where they want us, folks. And let's face it: we'll pay pretty much whatever we have to.