Cane Sugar, Crystallized Sugar, Sugar Trade, West Indies, Wealth and War

Posted by PITHOCRATES - May 7th, 2013

History 101

As Muslim displaced Christians from the Lands of the Roman Empire Sugar moved West

There is a war on sugar.  It’s making us fat.  And it’s making us sick.  Because it tastes so damn good.  We crave it.  And always have.  Since the first days we chewed on sugarcane.  Sucking out the juice.  Which was where that sweet delight was.  It was so good that the people in New Guinea (just north of Australia) learned how to plant it and raise it themselves.  Instead of just looking for it in the wild.  Around the eighth millennium BC.  From there it spread.  North.  To Southeast Asia.  Southern China.  And into India.  Where they took sugar to the next level.  They didn’t just chew on sugarcane to suck out the juice in India.  They refined it into a crystallized substance.  Around 350 AD.  Concentrating that sweetness.  And making it portable.  Then the Arabs entered the picture.

The Arabs took the Indian sugar-making technique and made it into big business.  They established plantations to grow it in tropical climes.  Where the two things that made sugarcane grow best—heat and water—were plentiful.  They built the first sugar mills to refine the cane.  Basically presses to squeeze out the juice.  Which they then boiled the water out of.  Leaving behind sugar crystals.  And added it to their foods.  As Muslim Arabs displaced Christians from the lands of the Roman Empire sugar moved west.  The Arabs introduced sugarcane plantations as far west as southern Spain.  When Christian Crusaders returned from fighting Muslims in the Holy Land they brought back crystallized sugar to Europe.  And they quickly fell in love with those white crystals.  By the late 13th century even England had grown a sweet-tooth.  Who would go on to consume so much of the stuff that they would rot their teeth away.

Then the Europeans entered the sugar business in the 15th century.  At first it was just the wealthy that enjoyed sugar.  Then it spread to the common people.  As demand grew they established new plantations to meet that demand.  In southern Spain.  The Atlantic island of Madeira.  The Canary Islands.  The Cape Verde islands off the west coast of Africa.  All had good growing climates for sugarcane.  And each plantation had its own processing plant.  For a ship’s hold full of crystallized sugar was far more valuable than a ship’s hold full of harvested sugarcane.  Making these plantations labor intensive endeavors.  And working the fields was backbreaking work.  To step up production required a larger labor force than was available.  And to meet that demand they turned to using African slaves.

Sugar was a Turning Point from an Agrarian World of Slaves and Indentured Servants to the Modern Industrial World

By the 16th century the Europeans were taking sugarcane across the Atlantic.  And African slaves.  The Portuguese, Spanish, Dutch, French and British brought sugarcane and slaves to Brazil, Cuba, Jamaica, Barbados, the Virgin Islands, Guadaloupe, Saint-Domingue (present day Haiti) and elsewhere in the Americas.  With the Caribbean Islands becoming the sugar capital of the world.  France’s Saint-Domingue being the single largest producer in the world.  Until their slave uprising.  It was France’s wealthiest possession in the Western Hemisphere.  And its loss changed French ambition in the New World.  For Napoleon had his eyes on rebuilding the French Empire in North America that was so rudely interrupted by France’s loss in the Seven Years’ War.  But with the loss of Saint-Domingue and all that sugar wealth Napoleon lost all interest in the New World.  And sold the Louisiana Territory to the United States.  To prepare for war with Britain.  Again.

The British and the French both had lucrative sugar plantations in the West Indies.  When the American Revolutionary War turned into a world war the British and French squared off once again.  Especially in the West Indies.  Where they wanted to protect their possessions producing that valuable sugar.  And take the other’s possessions.  So they could expand their holdings.  And their wealth from the sugar trade.  As well as put down any slave uprisings.  Such as would later happen in Saint-Domingue.  Some say the reason the British lost the American Revolutionary War was because they diverted too much of their military resources to the Caribbean.  But the French were diverting a lot of their military resources to the Caribbean, too.  Which is one reason why the war lasted 8 years.  As the French were more interested in taking the British possessions in the West Indies than American independence.  Their first efforts fighting alongside the Americans (Rhode Island in 1778.  Savannah, Georgia, in 1779) did not help the cause.  It was only when the French fleet could be spared from the action in the West Indies that they joined General Washington in trapping General Cornwallis at Yorktown in 1781.  With Cornwallis’ surrender effectively ending the war.  Even though they wouldn’t sign the final peace treaty until 1783.

By the end of the international slave trade Europeans sent approximately 10 million Africans to the New World.  Mostly to Brazil and the Caribbean.  To work in the sugar plantations.  Where slave ships left Africa.  They unloaded slaves in the New World.  Loaded the sugar these slaves grew.  Shipped the sugar back to the Old World.  Unloaded the sugar and loaded on finished goods.  Then sailed back to the African slave stations.  Where they traded their finished goods for more slaves.  There was big money in The Trade Triangle (trade from Africa to the New World to the Old World and back to Africa).  But sugar also helped to kick off the Industrial Revolution.  For the iron industry grew to make the machinery of the sugar mills.  As each plantation processed their sugarcane into crystallized sugar that was a lot of cast iron gears, sprockets, levers, axles, boilers, etc.  Basically a turning point from an agrarian world of slaves and indentured servants.  To the modern industrial world and wage-earners.

There is a Correlation between America’s Obesity Problem and the Switch from Cane Sugar to Corn Sugar

By the 19th century technology was making better sugar at lower costs.  The British designed a low-pressure boiler.  As water boils at a lower temperature when at lower pressure they were able to refine sugar with less energy.  Cutting production costs.  And waste.  As higher temperatures caramelized some of the sugar.  Though caramelized sugar can be delicious on crème brûlée you don’t want it when you’re producing crystallized sugar to sell.  Then the Americans improved this process by creating the multiple-effect evaporator.  A multi-stage device where the pressure is lower in each successive stage.  They use steam to boil water in the first stage.  This vapor then provides the energy to boil water in the next stage.  Which is at a lower pressure.  And, therefore, has a lower boiling point.  That vapor then boils water in the next stage which is at a lower pressure.  And so on.  Where one energy input creates a lot of useful work cost-efficiently.

With the advance in refining equipment refinery plants grew more complex.  And expensive.  So instead of building one on every plantation they built fewer but larger ones.  And shipped raw product to them.  Modern ships and economies of scale made this the new business model.  Companies grew and opened other refineries.  And expanded vertically.  Growing sugarcane as well as refining it.  One of the best at this was the American Sugar Refining Company.  That at one point controlled 98% of the sugar processing capacity in the United States.  Which earned it a spot on the original Dow Dozen.  The first 12 industrial stocks the Dow used in calculating their Dow Jones Industrial Average in 1896.  And remained a component of the Dow Jones Industrial Average until 1930.

Eventually the Americans couldn’t compete with foreign sugar producers any more.  They enlisted the help of Congress to impose tariffs on cane sugar imports.  Forcing Americans to pay more for their sugar.  Then they started making sugar out of government subsidized corn.  High-fructose corn syrup.  Which pretty much sweetens anything manufactured in the United States today.  That some say causes more health problems than cane sugar.  Including obesity.  Those in the high-fructose corn syrup business vehemently deny this.  But there is a correlation between America’s obesity problem and the switch from cane sugar to corn sugar.  Because of the different way the body metabolized corn sugar it did not satiate our appetite.  Leading us to over consume.  Such as with sugary drinks.  Which have gotten so large in size that New York City Mayor Bloomberg tried to make these large sizes illegal.  Because America’s over consumption of sugar was making us obese.  While Britain’s over consumption of cane sugar only rotted their teeth away.  It didn’t make them obese.  Which makes the case that corn sugar is less healthy than cane sugar.  Despite what the corn sugar lobby says.


Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Crude Oil, Separators, Pipelines, Cathode Protection System, Pump Stations, Tank Farms, Refineries, Distribution Centers and Gas Stations

Posted by PITHOCRATES - September 26th, 2012

Technology 101

Pipelines Crisscross the Country carrying Raw Crude Oil to Refineries and Refined Petroleum Products Out

Do you know what the most fascinating thing about the gasoline you burn in your car?  Only a few weeks earlier it was raw crude oil in the pores of rock deep underground.  The oil business is a remarkably efficient business.  Remarkable machines, pipelines and refineries have made getting gasoline into our cars a fast and speedy process.  But it hasn’t come cheap.  Those machines, pipelines and refineries are incredibly expensive.  Which is a power incentive to move and process that crude oil quickly.  From oil underground to gasoline in you gas tank.

And that process begins at the wellhead.  Because what comes out of that well is not pure crude oil.  What comes up the well is a frothy mixture of oil, gas and salt water.  They have separators located at or near the wellheads to separate this mixture into its components.  Getting the gas out of the oil is easier than getting the water out.  This often requires additional processing.  They can ‘dry’ the oil by cooking the water out.  Heating the oil (by burning some of the previously separated gas) in a container sends the oil to the top where it floats on the water.  The water pulled out of the well and separated from the oil is not clean enough to pour into a river or stream.  So they pump it back from whence it came.  Into another well.  Where it can help force more oil up to the surface.

They pipe the oil mixture from the wells in an oil field to these separators.  Pipelines from the separators carry the processed oil (and natural gas) to pipeline terminals.  Where they feed into a main pipeline that carries the oil to a refinery.  (Natural gas does not need refining and simply enters the pipeline system that distributes natural gas to end users).  Pipelines crisscross the country carrying raw crude oil to refineries.  And refined petroleum products out.  Sending jet fuel to airports.  Diesel fuel to railroad fueling yards.  And gasoline and diesel to the distribution centers that feed our local gas stations.

The Trans-Alaska Pipeline holds about 9 Million Barrels of Oil inside the Pipeline at any Given Time

There is a lot of political opposition to pipelines.  They say they are an environmental disaster waiting to happen.  In truth there have been few pipeline disasters.  For two reasons.  It takes an enormous investment to get oil out of the ground.  So any leaks in a pipeline would greatly reduce the return on their investment.  Secondly, oil is flammable.  Any pipeline leak could light the fuse to a powerful explosion.  Which would reduce their return on investment far more than just a leak.  So they make these pipelines out of high-strength steel with welded joints.  They even x-ray the welds to detect any defects.  Because any lost oil is lost profit.  Which means any accident that hurts the environment will hurt them in the pocketbook.  So they will protect the environment because that is the best way to protect their investment.

Steel corrodes.  Especially when in contact with the earth.  In fact, the chemical interaction of the elements in the soil with the steel in the pipeline acts like a battery.  Creating small electric currents that can accelerate the corrosion process.  So they cover these steel pipelines in layers of tar-like material and an insulation wrapping.  In addition to this they install a cathode protection system.  Where another more corrosive material is placed in contact with the pipeline so it corrodes instead of the pipeline.  Or they install an active system where they bury anodes underground along the pipeline and attach a DC power source.  They connect the positive terminal of the power source to the anode system.  And the negative terminal to the pipeline (the cathode).  This current can prevent the galvanic action that can accelerate the corrosive process.

Oil is thick and viscous.  It doesn’t flow easily.  So they need big (diameter) pipelines.  And lots of pumps to push this oil to a refinery.  Even under high pressures this oil moves leisurely along at about 3-5 miles per hour.  But it doesn’t have to move fast.  Not once we fill these pipelines with oil.  Because new oil pumped into the pipeline at one end pushes out oil at the other end.  And when it does it pushes out a lot of oil.  In fact, our pipelines hold far more oil than all our storage tanks at all our refineries.  The pipeline that crosses Alaska (the Trans-Alaska Pipeline) is about 4 feet in diameter and 800 miles long.  If you do the math that comes to about 9 million barrels of oil inside the pipeline at any given time.  By comparison a modern large oil tanker can carry up to 2 million barrels of oil.

We burn Gasoline in our Cars that mere Weeks Earlier was still Underground in the Porous Matrix of Rock Formations

There are pump stations about every 60-100 miles along a pipeline.  These pumps suck a lot of energy to pump that viscous fluid.  But it is still more cost efficient than shipping that oil by truck or rail.  These pumps usually have a roof over them.  But no walls.  To prevent any buildup of explosive vapors from accumulating.  Which is one of the drawbacks of dealing with petroleum oil and its products.  Especially the stuff we eventually pump into our gas tanks.

At pipeline terminals, refineries and tanker ports there is a backup of oil waiting to enter a pipeline.  Or to be refined.  So we have to store it.  In tank farms.  Where tidy rows of squat round tanks with floating roofs (to prevent any buildup of explosive vapors) hold enormous amounts of oil until the next stage in the oil processing system is ready for it.  But not for long.  These tank farms at our refineries hold maybe 2 weeks worth of oil.  Not much.  But enough.  You see, oil doesn’t sit still for long.  For it takes about two weeks for oil on average to travel from the wells through the pipelines to the tank farms at our refineries.  So as the refineries draw down this oil in the storage tanks new oil arrives to replace it.  In a continuous, wondrous process.  That ends at the gas station.

Refined petroleum products leave the refineries pretty much the way they arrived.  In a pipeline.  The refined products are thinner and less viscous.  So the outbound pipelines are smaller in diameter.  After refining they pump gasoline into another tank farm.  These tanks feed another pipeline network.  These pipelines eventually terminate at distribution centers.  It is here where tanker trucks fill up to replenish the underground tanks at our local gas stations.  The gas entering these distribution centers is the same.  The different gas stations will add their own additives at this point to differentiate their gas from their competitors.  Then we pump it into our car.  And then enjoy the American experience of travelling the open road.  Burning gasoline that mere weeks earlier was still underground in the porous matrix of rock formations.


Tags: , , , , , , , , , , , , , , , , , , ,

The Socialist Utopia of Oil-Rich Venezuela is Rationing Gasoline

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

Venezuela is a lot like Iran in a way.  They have lots of crude oil.  But little refining capacity.  Which is a problem because nothing really runs on raw crude oil.  It’s what we refine from it that we use in our cars, trucks, buses and power plants.  Causing a bit of a problem in Venezuela.  Because in their socialist utopia they virtually give their gas away.  Which was one thing when they refined it.  But another when they have to buy it (see Chavez’s gasoline rationing plan causes uproar by FABIOLA SANCHEZ, Associated Press, posted 7/20/2012 on Yahoo! News).

As home to the world’s cheapest gasoline, Venezuela has long had to contend with the hemorrhaging of supplies as smugglers haul gas across the border to cash in where the fuel costs far more.

In neighboring Colombia, drivers pay 40 times as much as Venezuelans to tank up — $1.25 a liter ($4.73 a gallon), compared to 3 U.S. cents a liter (11 cents a gallon).

So much gasoline is being taken out of Venezuela illegally that President Hugo Chavez’s socialist government imposed rationing on motorists in one state bordering Colombia last year, and now it’s touched off a furor in a second border state by announcing it will ration gasoline there, too…

Venezuela is a major oil exporter but its refining capacity is limited, so the government buys gasoline from the United States, losing money by then selling it at home for almost nothing. Those imports have been steadily rising since 2009…

Ramon Espinasa, a Georgetown University economist, blames “operational problems” at some Venezuelan refineries as well as rising demand from power plants built in the past two years that burn gasoline and diesel fuel.

“They’re not producing specialized (petroleum) products and must import finished products,” Espinasa said…

“It’s not rationing,” [Hugo Chavez] said. “It’s a means of control, to give everyone gasoline, because the gasoline here is practically free, so the idea is to give everyone what they need.”

One of the problems of socialism is that there is no incentive to risk capital.  Because if you invest and build a refinery the state will just take it away.  So that leaves the state to build their refineries.  And based on their refinery capacity shortfall that’s something the state just doesn’t know how to do.  Or else they would have done it.  And not have gasoline rationing.

Another problem with socialism is the whole ‘from those according to ability to those according to need’ nonsense.  Something that requires some people to work hard so others can have more.  Never a great inducement to get people to work hard.  So they don’t.  In socialism those who show the most need get the most.  And if they show no ability they don’t have to work hard to learn and acquire skills that will advance the economy.  So what can happen is that a chemical engineer with a college degree but no children may earn the wages of a janitor while a janitor with no college degree but with lots of kids can get the wages of a chemical engineer.  From those according to ability.  To those according to need.  You know what this gets you in the long run?  Gasoline rationing.

So socialism requires everyone to sacrifice for the greater good.  And based on the very large black market for gasoline that isn’t happening.  Which is why socialism fails as an economic system.  For people always look after their own interests.  Not the greater good.  Even in the socialist utopia of Venezuela.


Tags: , , , , , , , , , , , , ,

Carbon, Carbon Cycle, Crude Oil, Petroleum, Hydrocarbons, Oil Refinery, Cracking, Sweet Crude, Sour Crude, Gasoline and Diesel Engines

Posted by PITHOCRATES - April 25th, 2012

Technology 101

Crude Oil is made from Long Chains of Carbon Atoms Bonded Together with a lot of Hydrogen Atoms Attached Along the Way

Carbon.  It’s everywhere.  And in everything.  Like all matter it cannot be created.  Or destroyed.  It just changes.  As it creates the circle of life.  The carbon cycle.  Plants and trees absorb carbon out of the atmosphere.  And converts it into biomass.  Into wood.  And into animal food.  Where the digestive system converts it into carbon-based living flesh and blood.  That exhales carbon.  Plants absorb carbon and release oxygen.  Plants can’t grow without carbon.  And we can’t breathe without plants growing.  Carbon is constantly changing.  But never created.  Or destroyed.  From diamonds to pencils.  From sugar to carbonated soda.  From plastics to human beings.  It’s everywhere.  And everything.  Why, it’s life itself.

Carbon is a time traveler.  Carbon that once traveled through the atmosphere disappeared millions of years ago.  Buried underneath the surface of the earth.  Under intense heat and pressure.  Plankton and algae and other biomasses decayed until there was almost nothing left but carbon atoms.  Long chains of carbon atoms.  Forming great, restless pools of black goo beneath the surface.   Waiting for the modern world to arrive.  Waiting for the internal combustion engine.  The jet engine.  And plastics.  When they could be reborn.  And see the light of day again.

Crude oil.  Petroleum.  Black gold.  Texas tea.  Hydrocarbons.  Long chains of carbon atoms bonded together with a lot of hydrogen atoms attached along the way.  In the ground they’re mostly long chains.  When we get them above ground we can break those chains into different lengths.  And create many different things.  C16H34 (hexadecane).  C9H20 (nonane).  C8H18 (octane).  C7H16 (heptane).  C5H12 (pentane).  C4H10 (butane).  C6H6 (benzene).  CH4 (methane).  Some of these you may be familiar with.  Some you may not.  Methane is a flammable gas.  Hydrocarbon chains from pentane to octane make gasoline.  Hydrocarbon chains from nonane to hexadecane make diesel fuel, kerosene and jet fuel.  Chains with more carbon atoms make lubricants.  Chains with even more carbon atoms make asphalt.  While chains with 4 carbon atoms or less make gases.  All these things made from the same black goo.  A true marvel of Mother Nature.  Or God.  Depending on your inclination.

Older Coastal Refineries make more Expensive Gasoline than the Newer Refineries due to the Availability of Sweet versus Sour Crude

Another great carbon-based product it bourbon.  Made from a corn sour mash.  We heat this and the alcohol in it boils off.  That is, we distill it.  We run this gas through a coiling coil and it condenses back into a liquid.  And after a few more steps we get delicious bourbon whiskey.  Distilleries give tours.  If you get a chance you should take one.  You won’t get to sample any of the distilled spirits (insurance reasons).  But you will get a feel for what an oil refinery is.

An oil refinery works on the same principles.  Boil and condense.  And cracking.  Cracking those long hydrocarbon chains apart into all those different chains.  Long and small.  Into liquids and gases.  Even solid lubricants and asphalt.  All made possible because of their different boiling points.  The gases having lower boiling points.  The solids having higher boiling points.  And the liquids having boiling points somewhere in between.

Refineries are complex processing plants.  Not only because of all those different hydrocarbon chains.  But because of the crude oil introduced to these plants.  For there is light sweet crude.  And heavier sour crude.  The difference being the additional stuff that we need to remove.  Such as sulfur.  An environmental problem.  So we have to remove as much of it as possible during the refining process to meet EPA standards.  The sweet crudes are lower in sulfur.  Making them the crude of choice.  But this has also been the most popular crude through the years.  So its resources are dwindling.  Making it more expensive.  As are all the products refined from it.  Especially gasoline.  The more sour crudes have higher sulfur content.  And require more refining steps to remove that sulfur.  Which means additional refinery equipment.  So the older refineries that were refining the light sweet crude can’t refine the heavier sour crudes.  Which is why the refineries along the coasts make more expensive gasoline than the newer ones in the interior refining the heavier sour crudes.  Due to the availability of sweet crude versus sour crude.

The Modern World is brought to us by a Complex Economy which is brought to us by Petroleum

One of the main uses of refined crude oil is fuel for internal combustion engines.  In particular, gasoline engines and diesel engines.  Which are very similar.  The difference being the mode of ignition.  And, of course, the fuel.  Gasoline engines compress an air-fuel mixture in the cylinder.  At the top of the compression stroke a spark plug ignites this highly compressed and heated mixture.  Sending the piston down.  If the combustion occurs too early it could place undo stresses on the piston connecting rods and the crank shaft.  By trying to send the piston down when it was coming up.  Causing a knocking sound.  Which is a bad sound to hear.  And if you hear it you should probably make sure you’re using the right gasoline.  If you are you need to have you car serviced.  Because continued knocking may break something.  And if it does your engine will work no more.  So this is where octane comes in the blending of gasoline.  It’s expensive.  But the more of it in gasoline the higher the compression you can have.  And the less knocking.  Which is its only purpose.  It doesn’t give you any more power.  The higher compression does.  Which the higher octane allows.  Using the higher octane gas in a standard compression engine won’t do anything but waste your hard earned money.

And speaking of higher compression engines, that brings us to diesel engines.  Which are similar to gasoline engines only they operate under a higher compression.  And don’t use spark plugs.  These engines compress air only.  Which allows the higher compression without pre-ignition.  At the top of their compression stroke a fuel injector squirts diesel fuel into the hot compressed air where it combusts on contact.  Diesel fuel has a higher energy content than gasoline.  Meaning for the same volume of fuel diesel can take you further than gasoline.  Which is why trucks, locomotives and ships use diesel.  But diesel tends to pollute more.  The smell and the soot kept diesel out of our cars for a long time.  As well as the difficulty of starting in cold climates.  Advanced computer controlled systems have helped, though, and we’re seeing more diesel used in cars now.

The modern world is brought to us by a complex economy.  Where goods and raw materials traverse the globe.  To feed our industries.  And to ship our finished goods.  Which we put on trucks, trains, ships and airplanes.  None of which would be possible without a portable, stable, energy-dense fuel.  That only refined petroleum can give us.  It’s better than animal power.  Water power.  Wind power.  Or steam power.  For there is nothing that we can use in our trucks, trains, ships and airplanes other than refined petroleum products today that wouldn’t be a step backwards in our modern world.  Nothing.  Making petroleum truly a marvel of Mother Nature.  Or God.  Depending on your inclination.


Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Falling Oil Prices will lower Gas Prices, if the Fed stops Printing Money

Posted by PITHOCRATES - May 9th, 2011

Falling Oil Prices and you at the Gas Pump

Here’s something you don’t see every day.  Oil prices have fallen (see Special report: What really triggered oil’s greatest rout by Matthew Goldstein, Svea Herbst, Jennifer Ablan, Emma Farge, David Sheppard, Claire Milhench, Zaida Espana, Robert Campbell and Josh Schneyer posted 5/9/2011 on Reuters).

Never before had crude oil plummeted so deeply during the course of a day. At one point, prices were off by nearly $13 a barrel, dipping below $110 a barrel for the first time since March.

Apparently the speculators aren’t all that eager to buy and hold oil right now.  Something must have spooked them.  Because it’s May and the summer driving season is about to ramp up.  People driving around to enjoy their summers.  Some 3-day holiday weekends.  And a vacation or too.  Demand for oil should be up.  Not down.  So what happened?

A routine report on U.S. weekly claims for unemployment benefits spooked investors, showing the labor market in worse shape than expected. That fed a growing pessimism about the resilience of the global economy after industrial orders slumped in Germany and the massive U.S. and European service sectors slowed. Then the European Central Bank surprised with a more dovish statement on interest rates than expected, signaling its wariness about the euro zone outlook. The dollar rose sharply.

Oh.  So that’s what spooked them.  Recession.  Which is another name for continued high unemployment.  Looks like people will be taking more ‘staycations‘ this year.  Just like last year.  Which means people won’t be gassing up the family car for those long trips.  Instead of gas they’ll be buying more expensive groceries.  So the speculators don’t want to buy oil.  Demand for oil will drop.  And something with low demand has a low price.

A range of factors, both economic and political, were also at play. The recent rise in raw goods has been fueled in part by the U.S. Fed pumping cash into the markets by purchasing $600 billion in bonds. This program has pushed interest rates extraordinarily low, making borrowing essentially free once adjusted for inflation. Investors have been using the super-cheap money to buy into commodity markets. But the Fed’s program is slated to end on June 30.

The U.S. Fed in their infinite wisdom printed more money to entice business owners to expand business and hire more people.  Unfortunately, this also created inflation.  Made our money worth less.  And this raised prices.  So we bought less.  And if we’re buying less, businesses aren’t going to expand.  They’re going to contract.  To reflect the falling consumer demand.  So where did all that printed money go?  Wall Street.  Investors borrowed the money ‘for free’ and invested in commodities.  Which drove the prices up.  And oil is a commodity.  Now that the Fed is shutting off the ‘free money’ spigot, they’re not buying anymore.  They’re selling.  Hence the fall in oil prices.

China, the world’s fastest-growing consumer of commodities, also is tightening monetary policy to tamp growth rates and control inflation, raising the prospect of a slowdown in demand for oil.

And one of the big things that triggered the huge run up in oil prices back in 2008, an explosion of Chinese demand, is reversing itself.  They are trying to control inflation.  By slowing their economic growth.  And, of course, slower growth requires less energy.  And less gasoline for cars.

Put all of this together and it explains why oil prices are falling.  Which is typically what happens in a recession.

Recession and Tight Monetary Policy always lowers Gas Prices

The greatest factor in the cost of gasoline is the cost of oil.  Oil goes up and gas soon follows.  Oil goes down and gas follows.  Eventually (see Just say no to $5 gasoline by Myra P. Saefong posted 5/6/2011 on MarketWatch).

Despite Thursday’s drop, crude futures are still more than 9% higher, year to date. Crude oil makes up 68% of the price of gasoline at the pump, according to the EIA.

Overall weakness in the dollar is also to blame for rising gasoline prices. “The U.S. dollar has an inflationary impact on U.S. buyers, while also triggering increased buying in equities and commodities to stave off lost currency value,” said Telvent DTN’s Milne.

And there’s an “overlap” between refinery maintenance and a cluster of bad luck for Gulf Coast and Midwestern refineries, including electrical outages and storm-induced shutdowns, said Kloza. “This is the catalyst for the last leg [of the gasoline-price rise], which may take us to $4-$4.11, but also should soon stall.”

So we’re not going to see a corresponding fall in gasoline prices right away.  But it’s coming.

Still, gasoline prices may hold a $5 average in California, where a strict gasoline formula makes the state more susceptible to higher prices, and in New York, due to tax issues, he said.

Of course, there’s always concern over the start of the Atlantic hurricane season, which begins on June 1, given the potential for disruptions to oil production and refineries in the Gulf of Mexico.

Be grateful you don’t live in California or New York.  At least, when you’re buying gas.  The environmentalists have added about $1 a gallon to the price of gas in California.  And New York is just tax-happy.  Add that to the recent storm damage, heavy rains and Mississippi flooding, prices won’t be coming down anytime soon.  But they’ll be coming down.  Because they always do during a recession.  As long as the Fed stops printing money (which was President Carter‘s problem.  Prices stayed stubbornly high in the Seventies despite recession until Paul Volcker finally tightened monetary policy).

Drill Baby Drill

Supply and demand determines the price at the pump.  That’s why prices go up during the summer driving season.  And down when much of the world is shoveling snow.  Oil is the biggest factor in the price of gas (68%).  Therefore, the less oil on the market the higher gas prices go.  And the more oil on the market the lower gas prices go.  Simple supply and demand.  Which provides a very easy solution to bring gas prices down.  Drill, baby, drill.  The next best thing we could do to keep prices down is to increase refinery capacity.  The more capacities available to refine crude oil the less storm damage will affect the price at the pump.  Finally, roll back environmental regulations and cut taxes.  Californians could easily see a drop of a dollar a gallon.  Even with current oil production and refining capacities.

Energy policy can be very easy if only you can separate the politics from it.  But when your political base is defined by those politics, that ain’t going to happen.  So get use to high gas prices.  Because they’re being kept artificially high for political reasons.  And enjoy your staycation this year.  And next year.


Tags: , , , , , , , , , , , , , , , , , , , ,