Gas Pump Instructions

When I was 15, I remember going to ICBC to get a book to study for my learner’s license. Once I passed, it was already agreed with my parents that they would buy my first car. I was pretty excited about the whole prospect. One thing that struck me, even amidst all this excitement, was what we could call the trend of ever-increasing prices at the pump.

At the time, I remember sitting on the bus, going past a gas station with my buddies, staggering at the $0.35/litre signs. Just the year before, it had held pretty steady at the $0.20 range. Then, it just went nuts! We were seeing $0.50, then $0.60, then $0.70 and so on. In 2012, we saw a record high as gas prices went above $1.50/liter. In the cafeteria at school (where all the problems of the world are so very easy to solve), it seemed that the obvious reason for all this was that the oil companies were just getting greedy.

When I was in grade 12, I remember a picture circulating on the Internet of the home of a owner of a Middle Eastern oil company. It was pretty ridiculous. This guy owned a castle for a few people to live in, plus a car collection that looked like I was at the Richmond Auto Mall. On the news, even grown-ups were confused, as reporters gave reports on why they thought this was happening. Now that I’m older and wiser, I’m here to say that it has a lot more to do with greed.

Oil Is Like Any Other Commodity

Commodities are the raw materials that we use for everyday life. Things like fuel, the food we eat, lumber, metals, fabrics for clothing, and so forth. They have an interesting relationship with the economy. During times of inflation, the prices of commodities skyrocket. The idea is that with more money circulating in the economy, purveyors charge more since money is easier to come by. Basically, the value of money is lower. Oil is no different. And so the short answer to all this is simply inflation.

To illustrate, in 2008 the Wall Street Journal published a report showing the rise in gas prices backed against currencies of the world for the ten years prior. In those 10 years, the price of oil went up 350% backed against the US currency. Against the Euro, it went up 220%. Against the Canadian dollar, it went up 280%. Against the price of gold, it remained perfectly flat. So you see, it’s not that oil is getting more expensive; it’s that the buying power of your dollar is getting weaker. Do note that the same phenomenon happened with everything else. You’d see a spike in produce, clothing, homes, everything.

So, why is it that oil get singled out?

Is Greed Involved?

In any industry, capitalism is driven by the desire to build assets, no doubt. And the revenue generated in the oil industry is monstrous. And the owners of these companies make so much money, it’s hard not to believe that they’re not milking everyone for everything they’ve got. Like any other commodity, the profit margins on oil are quite small. It’s the sheer volume and demand that give it this illusion.

Case in point: about 5% of a barrel of oil is actually used for gasoline. The profit margin on that 5% of crude is actually 2%. That’s not a lot when you think about it. On an annual basis, the world uses 1.4 trillion liters of gas. If we worked out the numbers in CAD, the gas industry is generating $1.9 trillion in revenue. And 2% of that works out to almost $38 billion in profit. And that’s after paying the CEO’s salaries and not including the other uses for crude. We’re only looking at it from a gasoline for cars point of view in this post. There’s still 95% of that crude oil that isn’t being accounted for. That’s a LOT of money!

Oil Is Something To Keep An Eye On

Next to gold and silver, I consider oil to be one of the most important resources. The simple fact is that EVERYTHING we buy and use on a daily basis has some relation to oil. Trucks were used to deliver goods to factories, where they may have used oil in the manufacturing of the goods, and those goods ultimately ended up on another truck to be delivered to the store, which you drove to in a car… powered by oil. An increase in the price of oil means an increase in the price of everything… Or should I say the inflation of your dollar means an inflation in the price of everything?