Thursday, February 02, 2006

Milk and Gas: Inextricably Linked Prices

With all the recent hubbub about gas prices it made me think of a few comments I heard at a supply chain conference a year ago by an executive in the petroleum industry about the milk industry. Whether it's milk or soda, the other caramel-colored liquid that Americans are obsessed with, the prices of each have risen just as steadily over the past few decades, yet no one seems to be protesting. The speaker went on to discuss the milk supply chain and comment that in many US States, milk is pumped, pasturized, packed and typically shipped less than a few days, which then gets trucked on average only a hundred miles from the cows, which are plentiful and which don't require billions of dollars to maintain. Compared to the oil industry, oil first needs to be discovered in remote areas like the Artic regions or in war zones such as the Middle East, which costs lives and hundreds of millions of dollars, before a gallon is even seen. Then on the chance that its discovered, only 1 out of 7 digs actually find the stuff, it needs to be pumped up from miles below the earth's crust, which then needs to be refined and finally shipped for days, thousands of miles across the ocean in huge tankers then transferred to trucks. And yet the price of a gallon seems to stay on par with the cost of milk, which has a much faster and smaller supply chain. To give you an idea, since the early 1980s, milk prices have gone up about as much as gas prices - more than 80 percent in both cases, according to the latest available federal Bureau of Labor Statistics figures, which run through June.

Last time I checked we didn't have a massive gas pipeline running out of Madison, Wisconsin, so what gives? Where do these costs come from? Obviously, taxes add to high costs of gas, but my point is the reaction Americans have to the price of gas is unjustified. According to CNN, our friends in Italy pay $4.86 a gallon or even worse in England its five and change. So it could be a lot worse. So either buy a fuel efficient car or use alternative fuels. I hear switch grass is an idea.

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