Reflections Magazine June-July 2011
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The gas guzzler

 

Oil market uncertainty creates high gas prices

 

Why are pump prices on the rise? The answer can be summed up in a single word: uncertainty.

Oil prices have been at or above $100 per barrel since April and show no signs of dropping significantly. Sure, we had a brief lowering of gas prices after Memorial Day weekend, but ask yourself the same question that professional commodities traders do: Do you believe this marks the start of a steady decline to prices around $2.60 per gallon or are gas prices bound to increase?

Many people believe that higher gas prices are inevitable due to the current climate of oil uncertainty. So what are the factors contributing to this uncertainty? They are political instability in Libya, Egypt, Syria, Tunisia, Iran and Iraq, and the coming hurricane season. Recent massive flooding of the Mississippi River that shut down ports and put refining plants at risk also affected rising gas prices. But hurricanes and spring floods have been with us since the dawn of time, and political instability in the Middle East is nothing new. The oil industry was created with these pressures pre-existent, so they alone are rarely responsible for skyrocketing pump prices.

Other factors are playing a part in this uncertainty. In fact, there are five major sources of uncertainty in the fossil fuels markets that America can control, especially with the politicians Americans elect and the products they purchase. 



Crude Oil Supply

We are not running out of crude oil anytime soon. This is a radical environmentalist agenda that has unfortunately become mainstream dogma. The purpose of the “scarcity scare” is mainly to raise fuel prices and taxes. On June 8, Exxon announced a new finding of 700 million barrels of oil and gas equivalent in the Gulf of Mexico, and Chevron is doubling down on Gulf deepwater, not running away. Moreover, there are 60 billion barrels of oil sitting untouched in Alaska, wrapped up in environmental lawsuits and political turmoil, mostly concerning 0.01 percent of the Arctic National Wildlife Refuge. New oil and gas field are coming on line in Texas, North Dakota, Pennsylvania, New York and Canada.


For decades, Saddam Hussein robbed his citizens by pumping enough oil to pay himself and his cronies, but not enough to pay for oil field security and maintenance. By the time we deposed Hussein, Iraq’s oil production was a mere 12 percent of its capacity. As the fledgling democracy moves forward, so does its oil production; and offshore drilling is expanding rapidly in Brazil. So go ahead and drive—you don’t need to save gasoline for your great grandchildren, but you do need to save our American way of life.

Market Speculation

Oil speculators do run up prices unfairly, just to make a killing. Although the media castigated President George W. Bush for suggesting that speculators were responsible for the dramatic 2008 spike in gas prices, it turns out he was on to something. Oil is his family business, after all. In May 2011, the Commodity Futures Trading Association filed a lawsuit against two traders from the Swiss firm Arcadia Petroleum Ltd., accusing them of buying millions of barrels of oil in the first quarter of 2008 to create an illusion that U.S. inventory was critically low. They reaped more than $50 million selling the oil back. Stay tuned to this case, which will hinge on whether supplies were already low when the purchasing began.

Regulatory Climate

The 2010 oil spill in the Gulf of Mexico from the damaged BP Horizon deepwater drilling platform stiffened the regulatory climate for U.S. oil production. The Bureau of Ocean Energy Management, a new Department of Interior agency created hastily after the spill, understandably has a huge backlog in approving and renewing drilling permits. Gulf oil production will be nowhere near capacity until around 2014. Moreover, proposals for new offshore exploration on the Pacific and Atlantic coasts have dried up. Alaska Pipeline flow is far below capacity because access to crude oil is being prevented by environmental lawsuits and regulations. In addition, the Exxon Valdez spill has become the oil industry’s vampire, refusing to die and sucking the life from offshore production in Alaska. The industry fears the regulatory noose will tighten further if President Barack Obama is reelected.

Refining Capacity

Currently, U.S. refineries are not operating at peak production because gasoline stores are not depleted. A considerable amount of U.S. gasoline production is being sold overseas at a premium to countries that do not have adequate refining capability. Refiner’s profits are a factor in recent increased gas prices. Therefore, make a point to fill up at stations that offer consistently lower prices.

Worldwide Energy Demand and OPEC Production Quotas

The U.S. Energy Information Administration predicts that 2011 worldwide oil consumption will hit a record 88 million barrels per day. Demand for other fossil fuels will also hit all-time highs. Most of this increased demand is from developing countries.

Today, 30 million barrels of oil per day is produced by 11 counties in the Organization of Petroleum Exporting Countries (OPEC) Cartel. On occasion, OPEC will increase production in response to rising prices. But this June, they have declined to do so, with Africa and South American members apparently happy with current profits and in practice unable to increase production due to technological hurdles. OPEC sees a time in the not-too-distant future where the America and Europe will hardly be needed as customers, so we cannot expect to be catered to.

Despite all this uncertainty, one thing that is guaranteed is that increasing demand for gas is unsustainable without either greatly increased prices or expanded production. It is unconscionable for America not to develop its own fossil fuel resources because this would clearly lower prices and stabilize markets. If the price of oil keeps on climbing, then we doom hundreds of millions of people in developing countries to otherwise avoidable poverty because they will not be able to afford modern trucking, shipping and airline industries that efficiently move products to market.

The American people have the power to mitigate these factors; their purchasing power and the officials they elect can make the difference. 



-Dr. C. Leigh Broadhurst is a research geochemist and geobotanist.

 

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