Wednesday, April 26, 2006

Oil Drum Editorial on Gasoline Prices

We're in a political season with less than seven months to the midterm elections. There have been years when the political season for midterms has not started until after Labor Day but this year, with Bush's numbers continuing to fall and so many Republican scandals in the news, both parties are in their political season and this requires caution for everyone. Political seasons invite simple solutions and headline grabbing.

Gasoline prices over the last thirty years have a history. Part of that history is that people who warned that we need to secure our energy future have been burned by falling oil prices. It is easy to understand the caution of Republicans and Democrats, but members of both parties need to inform themselves. Little attention is paid to the fact that major oil discoveries have been getting harder to find for a long time now. Oil production during the eighties and nineties partly increased because of 'better production methods' but those methods have largely meant nothing more than the fact we learned to pump the oil out of the ground at a faster rate, not that there was a much greater quantitity of oil to pump.

The reality of a limited oil supply has never changed. Nor has the fundamental fact that we're heavily dependent on foreign oil. Only the headlines over the years have changed and they have often been misleading. The world is decades from running out of oil but there has been talk of whether we're reaching maximum worldwide oil production in the near term; eventually that time will be reached whether now or in twenty years or fifty years. At the moment, there can be no question that worldwide oil production is having trouble meeting demand. It's a complicated story and it has a lot to do with many countries and oil companies around the world not being forthcoming with the facts. In fact, there is considerable disagreement among countries and among corporations about what is happening.

If we take the long view, one thing is clear: loosening environmental regulations and trying various gimmicks to lower the price of gas without developing alternative solutions is a recipe for major upheavel down the road. There is a range of opinion about what those upheavels might mean or how soon they might come but it should be remembered that the energy crisis of the 70s stressed the American economy and broke the back of several economies around the globe (though mostly in the third world). We are still dealing with the consequences of those upheavels.

The experts at The Oil Drum have an editorial well worth reading. Whether they're right or wrong on all the details about what current energy prices mean, much of what they say is based on factual analysis. I recommend the entire editorial but here's an excerpt with one passsage I have put in bold:
The major factor that determines gas prices is the price of crude oil from which gasoline is derived. When crude oil prices are high, so are gas prices. The following are just a few factors that affect the price of a barrel of oil:

1 Oil companies do not single-handedly determine the price of oil. The price of oil is set on the crude oil futures market. Simply put, these prices are affected by supply and demand because, at present, oil trades in a global commodity market where increased demand or reduced supply in one place instantly translates into price shifts everywhere. A variety of publicly available information sources show that supply is relatively static at the moment, while world demand continues to grow as economies grow.

2 We have provided evidence many times at The Oil Drum that the output of major oilfields is declining and that we may now have reached a peak or plateau in global oil supply. Oil companies have not been able to increase production for a number of years, and it is unclear that OPEC is accurately reporting their reserves. Even if there were significant sources of high quality oil remaining, it is getting increasingly difficult and expensive to drill. These factors, along with aging infrastructure for oil exploration and a retiring workforce are also contributing to high oil prices.

3 The geopolitical situation is volatile, and an astute citizen may notice that every time there is news from Nigeria or Iran, the price of oil goes up because of the potential and real effects of these situations on world oil supply. Again, oil traders are fearful that the supply will not remain stable forever.

4 Countries like China and India are industrializing at a great pace, and while we are accustomed to obtaining oil at a comfortable quantity and price, it will be impossible (and immoral) to deny similar resources to these countries. China is working furiously to secure new oil supplies, and they're content to negotiate with countries we're reluctant to deal with, like Nigeria and the Sudan.

These points demonstrate that disruptions in the supply of oil that affect the price of gasoline at the pump are not just a temporary glitch.

Increasingly, we are going out into the oceans and into the arctic tundra to get our oil. As we saw with Hurricane Katrina and Hurricane Rita, these are environments where major disruptions can occur. Just getting to the oil is expensive and increasingly a technological challenge. Whatever else The Oil Drum is saying, these facts about production cannot be ignored. Production at the moment is having great difficulty keeping up with demand. Those are the facts. And both Republicans and Democrats need to deal with them. Leaving the solution entirely in the hands of the markets or former oil executives will only produce one hell of a roller coaster ride. The governments of China, India and several European countries are already taking the long view on their energy future; it is time for our government to do the same and to find sane solutions.


Blogger Truth4AChange said...

A very interesting post - thanks. Of course the Bush administration's principle strategy is to secure unfettered multi-national access to the major existing supplies, which is among the few goals that have actually been achieved in Iraq. If you haven't seen it already, you might be interested in Antonia Juhasz's recent book on the subject: "The Bush Agenda: Invading the World One Economy at a Time".

6:13 AM  

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