Pain at the Pump

Raharu Haruha · #1 (**permalink**) 04-30-2008, 08:40 PM

I recently wrote a paper in my English class on why gas prices are so high and why oil prices are so high. I don't really expect everyone to read it (it's like 1800 words like) so here's a summary.

You must consider the supply and demand of both oil and gas (because oil now takes up approximately 70% of the price of gasoline). The actual (estimated) supply of oil is very high, something like 3 trillion (plus) barrels across the whole world (and that's what we know right now, meaning there could be more). If the price of oil stays above $100 a barrel, then practically all of the oil in the sands and oil shale become economically recoverable. The amount of oil in oil sand and oil tar is close to about 1.7 trillion barrels in America, and 2.5 trillion in Canada. To put that into perspective, Saudi Arabia only has about 200 billion in proven reserves (which is actually a bogus number - another reason the price of oil should eventually fall). There is no actual oil shortage, we just aren't drilling it so it's artificially that high. Maybe if we had more oil companies there'd be more drive to do this, but government regulations (especially the green regulations) keep them from making it happen, but why should big oil care? they're making a killing as it is.

There is a shortage of gasoline. Gasoline is made in refineries and we currently consume about 3 million more barrels of it a day than we refine. This shortage is partly to make a profit, but also because it's so hard to open up a new refinery. Many people know of the oil the problems we had with gasoline in 80's. If you look at the graph below, you'll see that gas inflation is closing in on the rates it was at back then. However, there is a very big and distinct reason gas prices are rising quicker than they did before, and that reason is because now, opposed to the 80's, we have half the refineries that we had. This is a very serious problem that could be an easy fix, but even when there was a republican president and congress, they were unable to beat the green lobbyists, the farmer's lobbyists and in some cases the big oil lobbyists that did not want these places drilled (in the case of big oil they did not want anyone to share their 40 billion dollar profits).
gasprice.jpg

For those of you who want more details on my paper (or perhaps you like my style of writing), here it is with all its references:

Quote:

“Pain at the pump” has become such an old saying that news stations have had to stop using it. People simply get bored of hearing the same depressing news over and over – they need new depressing news. But just because the news stations have stopped covering it doesn’t mean it’s gone away. Gasoline prices have inflated near 300% in the last 10 years, making gas one of the best investments next to Google. Why have gasoline prices tripled in the past decade? By looking at the supply and demand of both gasoline and oil (gasoline’s largest component) you can begin to understand how, and the actual reason gas prices have risen so high is because of an increase in global demand and strict government regulations that create a shortage in the supply of gasoline.

The Californian Energy Commission (April 0

claims on their website that the four costs that contribute to the price of gasoline are oil, tax, refining and transportation. Over the past decade, only oil and transportation have risen in price. When the price of oil rises, the difference is passed onto the consumer. For example, if oil costs thirty dollars per barrel in 1990 which resulted in one dollar per gallon of gas, then oil that cost ninety dollars a barrel in 2008 would be around three dollars for a gallon of gasoline. Oil has been constantly rising in price since 1998 – when oil was $10 a barrel. Over the course of a decade oil has exceeded $100 a barrel. Oil is now approximately 70% of the cost of gasoline.

Oil is a commodity, which means that oil’s price changes daily. (about.com, April 0

. The actual price is not determined by a set formula, but the commodity traders do take into consideration the supply and demand of oil. Commodity traders use the term proven reserves or known reserves to define oil that is not yet drilled and is considered economically recoverable at the current cost for oil. (about.com, April 0

. For example, if a person were to find an oil field with 10 barrels of oil in it and the price of oil is $10 a barrel, then it would only be considered a proven oil field if it cost less than $100 to drill the oil. The price of oil is set by people who buy it with hopes that the price will go up so that they may sell it at an even higher price. These traders assume that either the demand will go up or that the supply will go down when they buy oil, and they judge supply by looking at the proven reserves of oil.

lol it's too long.

Raharu Haruha · #2 (**permalink**) 04-30-2008, 08:43 PM

continued

Quote:

As oil is slowly used up from the proven reserves and global demand increases there has been fear of an “oil crisis” due to the shortage of the supply of oil, and that has effect oils price. Many savvy writers have taken advantage of this trend in oil and written books like The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel, an investment book written by Glen Strathy (2006). Hubberts Peak is a scientific theory created by M. king Hubbert in 1956, it describes the peak in an oil fields life, and after an oil field has reached that peak the field begins producing less and less oil until the well runs dry. (P. 19, Oil Opposing Viewpoints, 2006). Two of the United States major oil fields have reached that peak, and they have both been slowly running dry since. The other major factor in determining the supply is OPEC (Organization of the Petroleum Exporting Countries) which is an international corporation that has control over much of the world’s oil, and because of their dominating market share they can pick their own price. They do this by controlling the supply that they produce. Many people fear that OPEC has begun to run out of oil and that they are experiencing Hubbert’s Peak. That fear has contributed to the rise in oil prices.

Despite the fact that oil fields will inevitably dry up if continually pumped out of the ground, and oil could end up costing $200 barrels of oil if all of the oil in proven reserves is used up, the global supply of oil is not at all scarce. M.A. Adelman (2006) defies claims that there will be an oil shortage, and he has written There is No Approaching Oil Shortage (P. 33, Oil Opposing Viewpoints). Adelman assumes that OPEC and none OPEC oil producing companies have either mistakenly or intentionally given false estimates on the supply of their proven reserves. Adelman (2006) wrote, “At the end of 1970, non-OPEC countries had about 200 billion [barrels] remaining in proved reserves. In the next 33 years, those countries produced 460 billion barrels and now have 209 billion ‘remaining.’ The producers kept using up their inventory, at a rate of about seven percent per year, and then replacing it. The OPEC countries started with about 412 billion in proved reserves, produced 307 billion, and now has about 819 billion left.” (p. 33, Oil Opposing Viewpoints).There is very little evidence that OPEC is experiencing a supply shortage. The EIA (Energy Information Administration) (2007) claims that the oil produced by OPEC has increase over the past several years, not decreased.

As the price of oil continues to rise, the amount of economically available proven reserves does too. Ethanol, solar and wind energy are examples of new alternative energy supplies that have become more affordable now that oil costs so much. Alternative energies are very popular, but it takes a very long time for the market to adjust itself towards these new types of energy. According to H. Sterling Burnett of the NCPA(2007), one of the alternative energies that is not very popular right now is oil shale and oil sand. It is estimated that the United States has 1.7 trillion barrels of oil tied up in oil shale, and The Oil Sands Discovery Centre (2008) estimates that Canada has 2.5 trillion barrels of oil in the tar sands. The Finfact Team (2005) reported that “According to Oil and Gas Journal, Canada had a reported 178.8 billion barrels of proven oil reserves in 2005, second only to Saudi Arabia.” As mining and processing of these alternative oil sources becomes cheaper, and while oil goes up in price, economic opportunities present themselves, and they all mean lowering the cost of oil.

A shortage can be caused by two things: too much demand or not enough supply. There is currently an oil shortage due to the increase of demand – which increases the price. In 2006, the United States consumed (demanded) 20, 687,410 barrels of oil every day (or 20,678.41 bbl). (EIA, 2007). The United States has been demanding more, and oil has been in a steady uptrend since 1983. The rest of the world (especially China) has also increased its consumption of oil. As demand increases, the prices will, too.

Oil is approximately 70% of the cost of gasoline, but oil prices do not define the cost of gasoline alone. Gasoline works on the principles of supply and demand too. Gasoline has only recently spiked because there is a shortage of gasoline. In order to make gasoline out of oil, it must be refined. The refining capacity of the U.S. is approximately 17,443,492 barrels per day (EIA, 2007), yet the consumption is 20,687,410 barrels. The difference is met by imports from other countries. Jerry Taylor and Peter Van Doren (2006) claim, the United States imports 5.8% of its gasoline from other countries (P. 83, Oil Opposing Viewpoints).

The gasoline shortage is mostly a supply shortage. The supply of refineries has not kept up with the demand for gasoline – intentionally to turn a profit. So long as gasoline is scarce, oil refineries are able to make more of a profit. However, that is not the only reason we have a refinery shortage. The government has taken steps to prevent new refineries from being built. Ben Lieberman (2007) claims that the Clean Air Act (CAA) and the Environmental Protection Act (EPA) have put a massive burden on refineries and specifically the building of new refineries (P. 77 and 78, Oil Opposing Viewpoints). He also points out that the number of refineries has dropped from 325 in 1981 to 149 in 2004. In 1981, refining capacity was significantly higher at 18,620,620 barrels per day. However, despite the significant drop in refineries, refining capacity has been rising since 1994. (EIA, 2007). Most of this rise in production is due to the increase of technology, and not the increase in the number of refineries.

Another reason oil and gas prices have gone up is because of the wars that have been occurring in OPEC and non-OPEC nations. The Iraq and Afghanistan wars have definitely contributed to the price of gasoline. When looking at a chart of the gasoline prices one can easily see a significant spike in price from 2001 to 2002 (the years that the War on Terror began). (Texas Super-Unleaded Gasoline Price History, 1979-2008). The reason war causes prices to go up is because of fear that the overall supply of oil might decrease quickly. If one were to buy oil the day before a war broke out in an oil producing country, then the very next day that same oil would be worth far more.

It can be said that whenever there is a crisis, someone can benefit from it. Reuters.com stated that in 2007, Exxon Mobil reported the largest profit any American corporation has ever reported. Exxon made $39.5 billion in profits. In a free market this type of profit is unrealistic. Surely, if there is that much profit to be made everyone would try to do it. But Exxon is able to make that type of profit because they bought oil when it was much cheaper. Now that the oil they bought has risen in value, their oil’s net worth has risen considerably – along with their profits. Seeking Alpha (2008) reported that Exxon also set a record for paying taxes. Exxon paid approximately $30 billion in taxes. One has to wonder if Exxon is making those profits because they’re a very good oil refiner, or if they are making those profits because they’re a good politician. The government has stopped the expansion of drilling, while at the same time, the government has put harsh restrictions on oil refiners, making it harder for them to expand. Both the government and big oil profit from these restrictions.

In order to fix the problem of high gas prices, the U.S. must build more refineries and begin to use our own supply of oil to fight off the rising global and domestic demand. Increasing the number of refineries and supply of oil will be a tough task because of government regulations and restrictions, but it is feasible, and in doing so many economic opportunities will be created. Ultimately gas prices will fall, regardless of U.S. participation because the supply of oil in Canada is so vast that it will drive prices down.

References
Andrea C. Nakaya (2006). Oil Opposing Viewpoints. Farmington Hills: Thomson Gale
The Californian Energy Commission (2008). http://www.energy.ca.gov/gasoline/margins/index.html
About.com (2008) <www.about.com>
Energy Information Administration (2007) http://www.eia.doe.gov/
H. Sterling Burnett (2007). Increasing America's Domestic Fuel Supply.
http://www.ncpa.org/pub/ba/ba590/
Oil Sands Discovery Centre (2008). The Oil Sands Story: The Resource.
http://www.oilsandsdiscovery.com/oil.../resource.html
Finfacts Team (2005). Oil sands put Canada second to Saudi Arabia in oil reserves. Finfacts, p. B2.
Texas Super-Unleaded Gasoline Price History (1979-2008). http://www.randomuseless.info/gasprice/gasprice.html
Reuters (2007) Exxon Mobil sets annual profit record No. 1 oil company posts mark despite lower fourth-quarter income. Reuters http://money.cnn.com/2007/02/01/news...obil/index.htm
Seeking Alpha (2008) Exxon's 2007 Tax Bill: $30 Billion. http://seekingalpha.com/article/6313...ill-30-billion

alksdfjas

Makedde · #3 (**permalink**) 04-30-2008, 08:44 PM

How do American petrol prices compare to Australian prices at the moment?

We pay around $1.45 per litre of fuel. I know you Americans pay by the gallon, whatever that is...

I'd be interested to know if, by comparing the prices, Americans actually pay more at the bowser than us Aussies.

SpankyTheWhale · #4 (**permalink**) 04-30-2008, 09:12 PM

I'm definitely feeling pain at the pump. I'm getting carpal tunnel syndrome from the pump trigger. Thanks a lot, pump!

Raharu Haruha · #5 (**permalink**) 04-30-2008, 09:54 PM

Quote:

Originally Posted by Makedde

How do American petrol prices compare to Australian prices at the moment?

We pay around $1.45 per litre of fuel. I know you Americans pay by the gallon, whatever that is...

I'd be interested to know if, by comparing the prices, Americans actually pay more at the bowser than us Aussies.

lol Americans have always and probably will always pay less than everyone else, but that doesn't mean we don't have a right to (*)(*)(*)(*)(*) about it.

Makedde · #6 (**permalink**) 04-30-2008, 09:56 PM

Quote:

Originally Posted by Raharu Haruha

lol Americans have always and probably will always pay less than everyone else, but that doesn't mean we don't have a right to (*)(*)(*)(*)(*) about it.

Of course you can complain, although, if you make allowances for your dollar being just a little lower than ours...it's possible that you guys are paying roughly the same as us.

Raharu Haruha · #7 (**permalink**) 04-30-2008, 09:59 PM

Quote:

Originally Posted by Makedde

Of course you can complain, although, if you make allowances for your dollar being just a little lower than ours...it's possible that you guys are paying roughly the same as us.

there's about 3.7 liters to a gallon, and we're paying around $3.70 for gas. So you're paying about $5 for gas. See, 10 years ago, gas was around one dollar. Three years ago it was closer to $2.

Makedde · #8 (**permalink**) 04-30-2008, 10:03 PM

Quote:

Originally Posted by Raharu Haruha

there's about 3.7 liters to a gallon, and we're paying around $3.70 for gas. So you're paying about $5 for gas. See, 10 years ago, gas was around one dollar. Three years ago it was closer to $2.

I get confused with the usage of the word 'gas', even though it's the same as petrol, lol.

I can remember about ten years ago, we were paying about 99c per litre.

What the hell happened?

Raharu Haruha · #9 (**permalink**) 04-30-2008, 10:23 PM

Quote:

Originally Posted by Makedde

I get confused with the usage of the word 'gas', even though it's the same as petrol, lol.

I can remember about ten years ago, we were paying about 99c per litre.

What the hell happened?

lol read my post... although only the bit on oil will apply to you. Gasoline... petrol refining is mostly domestic, so none of that applies to you.

Makedde · #10 (**permalink**) 05-01-2008, 12:44 AM

Quote:

Originally Posted by Raharu Haruha

lol read my post... although only the bit on oil will apply to you. Gasoline... petrol refining is mostly domestic, so none of that applies to you.

Yeah, I've heard about the oil thing. The cost of oil rises, our petrol prices rise, too.

Doesn't help that you have some places rigging prices to get more money out of the public, although thankfully there are now laws in place to prevent this from happening anymore.

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