By DAVID MOON, Moon Capital Management
Mark Twain observed that everybody
talks about the weather but nobody does anything about it. He could have been
talking about oil and gasoline prices.
Most of today's talk is
about what the government can or should do to solve the problem. News flash:
this price surge didn't occur overnight, the government didn't cause it,
government intervention is only likely to make it worse, and the core causes
aren't going to reverse any time soon, if ever.
The oil price increases
weren't caused by Quick Draw Cheney or war in the Middle East. Since the streets
of 8th-century Baghdad (then Babylon) were paved with tar derived from the
region's oil wells, that region has hosted wars. This is not a new
What is new is the
relationship between the changes in demand and supply of refined petroleum
In 1990 the world demand
for oil was about 66.2 million barrels a day. Refining capacity was 74.5 million
barrels a day, giving the world an excess refining capacity of about 13 percent
of daily demand. Over the last 15 years, however, the demand for oil has
increased much faster than our ability to refine it. By 2005, daily world
consumption was 84 million barrels, roughly equal to the world's refining
This recent price
increase is not the result of a supply shock that can be quickly fixed by
cranking up oil production.
Refining capacity is the
problem ' and that can't be corrected in weeks or months. With no excess
refining capacity in the system, the smallest changes in marginal demand trigger
a huge change in prices.
And there have been
tremendous changes in demand. Look east.
The world's largest oil
consumer, the United States, increases its consumption of oil by about 2.8
percent a year. The second largest oil consumer is China. Chinese oil
consumption rose 15.8 percent in 2004 and shows no sign of slowing. This doesn't
even take into account the accelerating demand in
There's your culprit.
The economies of the world are strengthening much faster than our ability ' or
more likely our willingness ' to meet their demand for
Consumer reaction ' not talk ' has, in total, been a collective yawn,
because over time gasoline expenditures have declined as a percentage of
In 1981 U.S. consumers
spent 6.2 percent of their pre-tax income on gasoline and motor oil. Goldman
Sachs estimates that oil prices would have to reach $105 a barrel for the
consumer 'gasoline burden' to reach that percentage of 25 years ago. The
investment bank also estimates that prices would have to reach $135 a barrel
before having any significant influence on consumer capital decisions, like what
kind of cars to buy.
In other words, at $70 a
barrel expect consumers and commentators to talk more than actually do anything
about these increasing oil prices. It's either oil or the weather. Or perhaps
football, but that's still three months
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).