As a product specialist for J&P Cycles, one of the benefits of the job is that I get the opportunity to talk to many different vendors on a daily basis. Recently I was talking with a vendor who provides us with oil and lubricants, and during the conversation we got a little side-tracked. This guy has been in the oil business for many, many years, so I figured he might know something about oil production.
I told him I saw a recent news report that said the oil spilled from that one well in the Gulf amounted to between 17 and 39 million gallons. That’s from one well! My question to the vendor was this: Why in the world do we have an oil shortage? And if, indeed, there is this abundance of oil, why are gas prices skyrocketing (after all, according to the rules of supply and demand, too much supply should mean lower prices, so what gives)?
That’s when my vendor hit me with an answer that was like smacking me in the forehead with a two-by-four. He says there is no oil shortage and indeed, there never has been. According to our vendor (who will remain anonymous), the oil companies use the word “shortage” to describe a delay in refining — not a shortage of raw materials. I tried to do some research on this subject, but it’s difficult to determine how many oil rigs are out there. One report said 4,000 active oil rigs, and another said 5,600. If you do a little math here, the numbers are mind-boggling.
And those numbers don’t even count the Baker Hughes North American rotary rig count, which keeps tabs on the number of drilling rigs actively looking for oil or natural gas in the U.S. and Canada. The current number is a staggering 1,860.
The vendor explained to me that the issue is the oil refineries. They control the pricing of oil, and these refineries are owned by four or five major oil companies. These major oil companies tend to work together when it comes to market value, and the smaller guys in the business fall in line with whatever the major oil companies do. These companies can create delays, which can cause demand to rise. This in turn gives them the ability to raise prices.
Another big component that affects prices is speculators (they buy and sell oil “futures” as a commodity.) Futures are contracts for oil delivery from a refinery, usually 30, 60 or 90 days out. This is where the bulk of price volatility comes from, says my vendor.
For the working man, rising fuel prices have only made a difficult economy even more difficult. I ride my motorcycle because I enjoy it, but the truth is, I’ve been riding it lately because it’s what I can afford. My Ford F150 gets a whopping 14 miles per gallon — and I need to keep my truck because I spend my weekends at Home Depot trying to complete the laundry list of home improvements I need to accomplish. Unfortunately I can’t haul drywall in a Ford Focus.
So the next time you stop at the pump, or are watching the news and hear some excuse concerning an oil shortage, it’s perfectly legitimate to be a bit skeptical. If my vendor is right, what you might be seeing is just another smoke screen so someone can stuff their pockets with your family’s hard earned money! Meanwhile, I’m planning to continue riding my bike in order to keep some of that cash out of someone else’s pocket. And I’m hoping you do too.