By John W. Schoen Senior producer
updated 3/26/2008 7:26:21 PM ET 2008-03-26T23:26:21

This week, readers are looking for honest answers on the reasons behind the recent spike in oil prices. Some may not like what they hear, but we'll give it a shot.

Let’s be honest. We all know that the oil market is being manipulated to drive up the price and profit for oil companies. … Do you think anybody in DC will do anything or are they just too busy cashing those lobbyists’ checks to keep the unimaginable profits rolling in?
Richard A., Covington, Ga.

The honest answer is the reason oil prices keep setting records is that demand for fossil fuels is growing faster than the world’s oil producers can find new sources to satisfy that demand and replace the oilfields that are used up. A lot of readers don't like that answer, but it's the truth.

Prices of commodities in limited supply — gold, corn, Hannah Montana tickets on eBay — are set by the market, not the producer. The latest price is set by the last buyer, often represented by those folks waving their hands around and screaming in the trading pits, based on what the buyer is willing to pay for it. If a producer decided to ask for, say, $125 a barrel when the market price was at $100, why would anyone pay that price?

There was a time, in the early days of the Texas oil boom, when crude came out of the ground faster than producers could find a place to put it and each new gusher sent prices crashing. Eventually, the Texas Railroad Commission won the right to set limits on oil production and, in effect, set prices. That worked well as long as the U.S. companies regulated by the commission produced almost all of the world’s oil. But by the 1970s, that era was over, and Mideast producers formed OPEC, a cartel modeled after the TRC. But with so many players in today's global oil market, even OPEC has had mixed success in managing prices as its members squabbled over political differences and cheated on assigned production quotas.

Today, independent oil producers like Exxon Mobil, Chevron, and BP are relatively small players — as big as they are. The bulk of oil is produced by non-U.S., state-owned oil companies — many of them in parts of the world where corruption, underinvestment or violence have hurt efforts to expand production.

Congress has no more control over oil prices that you do. Some countries, like China and Venezuela, keep prices low by subsidizing the cost to retail buyers. That could happen here too, but all you would do is take taxes paid by everyone and give them to people who use gasoline. You would also encourage people to use more gasoline, which is not a great idea when it’s harder and harder to find the oil needed to make it.

Congress could, and should, end the large tax subsidies it handed out to oil companies to promote oil production a few years ago — just as those companies began setting record profits. There’s no reason they can’t use those profits money to explore for oil and leave the tax breaks for companies that need them. Congress could also raise the amount of money it charges oil companies for the right to drill in areas controlled by the federal government. That oil belongs to the U.S. taxpayer — oil companies just lease the right to produce it. And Congress could open up more oil-rich offshore areas under its control to drilling, demanding strict environmental controls and stiff fines to pay the cost of cleaning up any spills.

Making oil less profitable to produce means producers have that much less incentive to find more. But no matter how profitable, the era of “cheap” oil is over. The deeper oil companies have to drill, the higher the cost of producing the next barrel, and the higher the price goes. So we’re not going to produce our way out of the current fix we’re in.

That leaves the question of demand. Every barrel of oil you don’t consume is just as good as the new barrel of oil you find and produce. There, too, demand is being driven by forces outside the U.S., especially the rapid growth in the developing world. You can’t tell a billion Chinese workers in newly-built cities to go back home and leave the relatively high-paying jobs that are allowing them to accumulate enough wealth to own cars. As all those new cars hit the road, demand for gasoline will keep going up.

So if demand keeps rising, and you can’t find more oil fast enough, the only way to meet that growing demand is to get more out of each barrel. For American consumers, that means cars that go farther on each tank of fuel, which is where most of the oil consumed here ends up.

The same thing happened in the 70s: we all weatherproofed our homes, bought higher mileage cars and, lo and behold, oil demand actually dropped, which sent oil prices crashing.

There’s no reason the same thing can't happen again. So far, high prices don’t seem to have curtailed Americans' desire to zoom down the highway in low-mileage, high-powered trucks, most of which will never leave asphalt or haul a load and rarely carry more than one person. Until that changes there's little chance of bringing oil prices back down. Shifting blame on oil companies won’t make it happen.

Why are diesel prices so much higher than regular gas? Doesn't it cost MUCH less to refine diesel than unleaded? I've been paying close to $4/gal for diesel at stations with $3/gal for regular. I've seen this question on many blogs and the best answer anyone can seem to give is gouging.
Travis C., Baltimore, Md.

No, it does not cost much less to refine a gallon of diesel. The biggest single cost is crude oil which is the same for diesel and gasoline. It costs the same to ship a gallon of diesel from a refinery to your tank. While it’s true that diesel is slightly less “refined” than gasoline, that doesn’t lower the cost. In fact, refiners have just spent hundreds of millions of dollars to upgrade their plants to meet new ultra-low sulfur diesel standards set by the government to reduce air pollution.

Diesel prices also depend on supply and demand, and the balance between the two varies somewhat for the two fuels. If diesel supplies tightens relative to demand, prices go up — no matter how much it cost to make.

Scores of states and the federal government have tried to find evidence of gasoline price gouging. Except in isolated instances where wholesalers or retailers took advantage of short-term interruptions in supply, the evidence just isn’t there. Over the long run, markets set prices, not oil companies.

Where can I find a track of oil prices comparing week to week or day to day? What the price was on Monday compared to Tuesday compared to Wednesday etc.?
Phillip P., Dublin, Va.

The Dept of Energy's Web site is a wealth of information on petroleum prices, including a weekly commentary called The Week in Petroleum, which is updated every Wednesday when the weekly government numbers on prices and inventories are released.

You can also track gas prices daily at the AAA’s Web site, Daily Fuel Gauge Report, which also offers up state-by state prices.

AAA gets its data from the Oil Price Information Service, another great resource for the latest on industry trends. Check out OPIS President Tom Kloza’s blog, Speaking of Oil.

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