Gas Prices....what happened to the monopoly?

Well, the cost of gas continues to plummet throughout the world as the local St. Louis price has dipped below $1.50 per gallon most everywhere with the lowest local price currently at $1:33 at the local Costco. The days of $4.00 per gallon gas seems a distant memory but it was only a few months ago. About a month ago gas prices were hovering above 2.00 a gallon and I boldly predicted that we would see the price drop to at least $1.20 before it bottoms out. Mom thought I was crazy but I saw the writing was on the wall with the global economic slowdown causing a mass drop in demand which in turn would drop the price substantially.

It is funny because while on a training run a few months ago there was some discussion about how OPEC "controlled" prices and exerted monopoly pricing power with a certain individual arguing there would be a permanent price of something like 3.50-4.00 per gallon range. I disagreed as the OPEC member countries are not the exclusive source of worldwide oil supply and in fact, I argued, the price of oil is based on global supply and demand and historically even OPEC countries have failed to live up to their promises to cut production to boost the price of oil. So, in my view the price of oil surged when huge numbers of consumers in the newly industrialized world came online with new purchasing power they exercised in purchasing cars where previously they walked, took bikes, public transportation etc and suddenly they were competing with Americans and others in the old industrialized world for roughly the same amount of oil supply. Why wouldn't the price shoot up dramatically? Now, those same consumers are cutting back on their purchases as the global credit crisis has forced massive slowdowns in economic activity world wide. Hence, we are seeing low gas prices since the number of purchasers has decreased substantially.

While this is good for consumers it is more problematic for world wide peace and stability. I remember reading some time ago about how the hard liners in Russia were able to come to power when the price of oil dropped from over $50 a barrel to $10 a barrel about 10 years ago. Why? Because oil is a major export source of income for Russia and suddenly the Russians were far less wealthy than before and they elected men like Putin who was able to ride a wave of popularity on the back of a huge oil price spike to over $100 a barrel. Indeed, it has been argued that Russia's meddling in Georgia was in reality a power play to prevent foreign control over pipelines for oil and gas to compete with Moscow's own planes to exert monopoly like control over Europe's energy needs. This power play was predicated on the idea that controlling Europe's access to expensive oil and gas reserves would ensure Russian economic independence and support further control by the Kremlin of key industries through either direct ownership or through cronies of those in power.

Unfortunately for the wealthy oligarchs in Russia who pursued this military adventure their wealth has taken a double hit: first a good chunk of foreign capital fled the Russian stock market causing an overall 70% decline in the overall price of Russian securities and the unrelated global economic slowdown as already discussed cut the value of the Russian oil holdings substantially. Recent news stories in the papers have focused on how Russia has been awarded the 2014 Winter Olympic Games and construction on the venues has basically come to a halt due to the losses faced by the Russians backing the Games in the value of their stock holdings. So, the Russians are hurting economically which bodes poorly for European stability as their leaders have historically looked abroad for some external force to blame for their sufferings. This could result in further military escapades which is one of the few areas left to them where they can exert some measure of superiority over their neighbors now that the value of their gas holdings is significantly diminished.

I hope Obama is up to the task of dealing with a Russia that is now flirting with despotism since their legislature recently passed a law which would allow Putin to return to the presidency despite his recent departure due to term limits. So, Russia is one of the few areas where I think we should be directing the majority of our attention on the foreign policy front, and I don't see much evidence either the Bush or Obama team are taking the issue seriously enough.