A PRIMER ON OIL PRICES
By Alan Caruba
There are vast forces at work regarding the price per barrel of oil, and one of them is the speculation that has driven up the cost, despite the fact that there are ample supplies. The problem is not lack of oil, but whether it can be shipped to a waiting world. The potential for conflicts in the Middle East and elsewhere worries the marketplace.
Sebastian Abbot, an Associated Press reporter, points out that, “Hedge funds and other financial institutions have been buying and selling oil contracts in an attempt to generate profits.” Such trading has little to do with actual supply and demand and more to do with the kind of gambling that led to the sub-prime mortgage meltdown. And what goes up will go down. The cost of a barrel of oil is also tied to the value of the U.S. dollar, whose decline against other currencies adds to the cost at the pump.
It is likely, too, that the lack of production capacity in the world oil market plays its role in the profits being made these days, primarily by nationalized, as opposed to privately owned, oil companies. Rarely noted are the huge risks and huge investments taken by privately owned oil companies. This is in marked contrast to the nationalized (government-owned) oil companies representing some 70% of the world’s known oil reserves that, with the exception of the Saudis and other Persian Gulf states, are almost universally failing to make adequate investments in exploration or the upgrade of their facilities.
Cassidy points out:
Are you prepared for a shock? ExxonMobil owns only 1.08 percent of the world’s oil reserves. When you add the five largest private global oil companies together, they represent only 4 percent of the world’s oil reserves.
As Richard W. Rahn, a senior fellow of the Discovery Institute, pointed out in a November, 2007, article published in The Washington Times, “The high price of oil is a direct consequence of artificial supply constraints imposed by the Organization of Petroleum Exporting Countries and other countries.”
OPEC is composed primarily of Arab and African oil producing nations, along with Venezuela. Together, they control about 77 percent of the world’s known liquid crude oil reserves. Like that of Russia and Mexico, this state-owned oil is widely seen as poorly managed. “By contrast,” notes Rahn, “the U.S. only has about 2 percent of the world’s oil reserves, but produces more than 8 percent of global production, largely because they are privately owned and managed.”
Despite current high prices at the gas pump, Congress refuses to permit exploration and extraction of potential and known oil and natural gas reserves from 85 percent of the nation’s continental shelf off either the East or West coasts. As this is written, China is exploring for oil offshore of Cuba, barely 90 miles from Florida.
Congress has consistently refused to allow exploration and extraction of the vast oil reserves located amidst the 1.5 million acres of the Alaska National Wildlife Reserve. Less than 2,000 acres would be affected. The Department of Interior estimates that 3.5 billion barrels exist. I have read estimates of as high as 16 billion barrels. For all the political bombast of being “energy independent,” our own government stands in the way of accessing our own oil and natural gas.
Another factor plays a role in the price of oil. It is our capacity to refine it for gasoline and other products. Not one single new oil refinery has been built in the U.S.A. for nearly 30 years. The reason is that environmentist organizations that have advocated a vast matrix of environmental laws passed since 1970 have made it too costly to build one. These are billion dollar investments and no oil company is going to spend that kind of money in the face of hysterical objections by the Greens and impossible obstacles from federal and state government agencies.
A recent explosion at a Texas refinery will only serve to drive up the cost of gasoline and other oil products. Troubles in Nigeria contribute to the recent up-tick on oil prices. The slowdown of oil production in Iraq following the invasion is yet another factor.
Wonder why gasoline costs more? In order to fulfill various air pollution reduction plans, gasoline and diesel must be refined into some 17 different formulations. With three grades of gasoline, that means that refiners must produce some 45 separate blends. That’s expensive, and the cost is, of course, passed along to consumers. Since demand outstrips production capacity, weekly gasoline imports more than doubled between 1992 and 2004.
The mandate to include the gasoline additive, ethanol, largely made from an ever-increasing amount of the nation’s corn production, further adds to pain at the pump. The irony here is that it drives up the cost of food, while reducing the mileage available from a gallon of gasoline with this additive. As a result, oil refiners have cancelled an estimated 40 percent of planned expansions, reducing potential new output from 1.6 million barrels per day to less than 1 million barrels daily.
The hard math of a growing U.S. population, plus the fact that petroleum accounts for about 40 percent of U.S. energy supply, two thirds of which must be imported, means that Americans are caught in a government designed energy vice. American transportation runs on oil. It accounts for about 28 percent of U.S. energy use.
As America’s infrastructure of roads and bridges ages, a two-year study by the National Surface Transportation Policy and Revenue Study Commission recently urged Congress to raise the tax on gasoline by as much as 40 cents more per gallon.
At the same time, the latest energy bill has increased Corporate Average Fuel Economy (CAFE) standards to require vehicles to get 35 miles per gallon by the year 2020. Analysts project an increase in the cost of buying a new car between $900 and $10,000, depending on which expert is consulted. The only way to achieve this is to drastically reduce the weight of a car, thus increasing the potential for a lethal accident and more dead Americans on the highway.
New oil discoveries consistently put the lie to the “peak oil” hypothesis, but a lot more Chinese and Indians, among others, are going to want their own cars as their national economies improve. Investor’s Business Daily recently pointed out:
U.S. energy policy, as it presently stands, is designed to drive up the cost of oil and its derivatives for every American because the policy will not permit exploration and extraction, and it will not encourage or permit new refineries to be built. The mandate for ethanol use also increases costs. In addition, the government is likely to increase gasoline taxes at some point.
This isn’t a policy designed to ensure an adequate supply and promote economic growth and prosperity. It is a plan to reduce the buying power of Americans for every necessity. It is abetted by the many environmentalist organizations that oppose all oil and other energy sources use. It is legislation written by members of Congress who appear to be utterly clueless about the basic economic laws at work here and around the world.
Does this make any sense to you? In November, 2008, we will elect a new President and many members of Congress. Each one of them must be asked what they intend to do about this mess. If particular candidates start bad mouthing “Big Oil,” vote for someone else.
Political Environmentalism Versus Human Progress & Prosperity:
Policy Issues Relating to Energy, Environment,
& Natural Resources
Alan Caruba is a veteran business and science writer, a Public Relations Counselor, and Founder of the National Anxiety Center, a clearinghouse for information about media-driven scare campaigns. Caruba writes a weekly commentary, "Warning Signs," posted on the Internet website of the National Anxiety Center, which is located at www.anxietycenter.com.
Caruba has a daily blog at http://factsnotfantasy.blogspot.com.
Caruba’s new book, Right Answers: Separating Fact from Fantasy, has been published by Merril Press.
Africa: Black Africa *
Africa: North Africa *
American Government 1
LINKS TO PARTICULAR ISSUES & SUBJECT MATTER CATEGORIES
TREATED IN THE PROGRESSIVE CONSERVATIVE, U.S.A.:
American Government 2 * American Government 3 * American Government 4
American Government 5 * American Politics * Anglosphere * Arabs
Arms Control & WMD * Aztlan Separatists * Big Government
Black Africa * Bureaucracy * Canada * China * Civil Liberties * Communism
Congress, U.S. * Conservative Groups * Conservative vs. Liberal
Constitutional Law * Counterterrorism * Criminal Justice * Disloyalty * Economy
Education * Elections, U.S. * Eminent Domain * Energy & Environment
English-Speaking World * Ethnicity & Race * Europe * Europe: Jews
Family Values * Far East * Fiscal Policy, U.S. * Foreign Aid, U.S. * Foreign Policy, U.S.
France * Hispanic Separatism * Hispanic Treason * Human Health * Immigration
Infrastructure, U.S. * Intelligence, U.S. * Iran * Iraq * Islamic North Africa
Islamic Threat * Islamism * Israeli vs. Arabs * Jews & Anti-Semitism
Jihad & Jihadism * Jihad Manifesto I * Jihad Manifesto II * Judges, U.S. Federal
Judicial Appointments * Judiciary, American * Latin America * Latino Separatism
Latino Treason * Lebanon * Leftists/Liberals * Legal Issues
Local Government, U.S. * Marriage & Family * Media Political Bias
Middle East: Arabs * Middle East: Iran * Middle East: Iraq * Middle East: Israel
Middle East: Lebanon * Middle East: Syria * Middle East: Tunisia
Middle East: Turkey * Militant Islam * Military Defense * Military Justice
Military Weaponry * Modern Welfare State * Morality & Decency
National Identity * National Security * Natural Resources * News Media Bias
North Africa * Patriot Act, USA * Patriotism * Political Culture * Political Ideologies
Political Parties * Political Philosophy * Politics, American * Presidency, U.S.
Private Property * Property Rights * Public Assistance * Radical Islam
Religion & America * Rogue States & WMD * Russia * Science & Ethics
Sedition & Treason * Senate, U.S. * Social Welfare Policy * South Africa
State Government, U.S. * Subsaharan Africa * Subversion * Syria * Terrorism 1
Terrorism 2 * Treason & Sedition * Tunisia * Turkey * Ukraine
UnAmerican Activity * UN & Its Agencies * USA Patriot Act * U.S. Foreign Aid
U.S. Infrastructure * U.S. Intelligence * U.S. Senate * War & Peace
Welfare Policy * WMD & Arms Control
Africa: Black Africa *
Africa: North Africa *
American Government 1
POLITICAL EDUCATION, CONSERVATIVE ANALYSIS
POLITICS, SOCIETY, & THE SOVEREIGN STATE
Website of Dr. Almon Leroy Way, Jr.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
An Online Journal of Political Commentary & Analysis
Dr. Almon Leroy Way, Jr., Editor