On oil price at $200 and business as usual

The guys at Goldman Sachs have done it again. They raised the benchmark for the oil barrel to $200. GS’s boys believe that due to inadequate supply growth oil prices are increasingly likely to hit between $150 and $200 a barrel over the next six to 24 months.

Last year the markets thought they were crrrrazy when forecasting $100 a barrel. And now we are playing around $122.

Crazy Hillary and McCain’s gas tax holidays aside, the slowing of the US machine is not enough to balance the raising oil needs of energy inefficient and hungry China and India.

The States might or might not get into a short/long, deep/shallow recession in the coming years, and the world economy might follow, but one thing is for sure, the BRIC nations might slow down as well, but at the very least they are going to leave their oil needs at current levels.

A few days ago CNNMoney pulled a related list, global petrol prices in the last two weeks of March. Needless to say, by far the cheapest were oil producing countries and third world nations, where low personal incomes translate into low tax-grabbing.

1. Bosnia-Herzegovina, £1.463/litre
2. Eritrea, £1.290/litre
3. Norway, £1.176/litre
4. United Kingdom, £1.129/litre
5. Netherlands, £1.128/litre
6. Monaco, £1.119/litre
7. Iceland, £1.115/litre
8. Belgium, £1.107/litre
9. France, £1.087/litre
10. Germany, £1.059/litre

111. United States, £0.465/litre

In the UK, fuel tax comes at an incredible 81.5% per litre for conventional unleaded petrol. How come petrol/gasoline is so cheap in the States? Let’s summarise it in a single word: TAX.

In the US, total state and federal fuel tax varies from 16.88% per litre of gasoline in California to, hold on to your pants, 6.97% in Alaska. The average for the country being 12.42% (and that is just an average based in selling prices, not consumption). I remember when I first moved to the States, 2001 in California meant $0.64 per gallon, £0.17 per litre, that felt just not right.

I see why a $200 per barrel price is feasible. I know that not all oil is refined to produce petrol, but from that point of view, in the US there is a lot of scope to increase the price at the pump until it reaches for example, France’s level of $8.07 a gallon (and they are already going bananas with petrol average prices last Friday at $3.67!). Plus, that is at $89 a barrel in average last March, the $120-125 have yet to be felt.

But now, following typical Fed behaviour, two candidates to the White House, Hillary (D) and McCain (R), are proposing a preposterous idea: A tax-holiday for the summer. The theory goes like this, since Americans drive a lot more on holidays, let’s keep their costs as low as possible.

Seriously, it really takes all my will and mental power to find the logic behind this proposal, and still I don’t.

So we’ve got here spoiled children who have grown to think that buying things they don’t need with money they don’t have is the natural way of life, and instead of opening their eyes, the world improvers of the day think of nothing else but keeping the fantasy going. It is like avoiding going to the dentist, you can do it, but eventually you will end up there, and it will be far more painful.

If petrol/gas is so expensive you can’t almost afford it you have several options. First of all, you just don’t go on holidays! You can also drive less, change to a less consuming car, public transport, car pooling, whatever, you are a smart kid with your big house and fancy gadgets, go figure. I just limit myself to driving under 2,500rpm, and guess what, I pull 10-15% more miles per tank.

I happen to commute by car every given day, and the overall cost has gone up from £160 a month in January to £185. Of course if I add car insurance and maintenance it goes up to about £280 per month, but still is cheaper than the monthly train pass at a whooping £245+£60 parking per month and it is far more convenient.

Given the VAT/fuel tax relationship with the final petrol price in the UK, and the low price elasticity of it, I don’t think petrol price will directly be the thing that reduces driving in the UK. That definitely applies to me, so long as petrol stays below £1.40 (estimated price at $200 a barrel) it will still make more sense for me to drive. The same calculation in the US would more than double the price at their pump though leaving it at EU prices. Ironically the market cushion of tax cannot save them.

Personal accountability and more realism is what it is missing in this world.



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