Friday, 13 June 2008

The Oil Crisis

I have heard many Republicans/Republican Leaning pundits on news & radio shows recently that what is keeping gas prices so high is that the Dems won't let us drill for more oil here in the US.

Of course I am supporting Obama, so I am a little bothered by these claims, but even if I were not, I just think it is silly to point our fingers at one group and say it's all their fault. Because of this, I was inspired to write this post, after doing some research of course.

Just for the record, I am an Independent that is supporting Obama.

While many Dems may be blocking drilling in places like ANWR, Alaska (which just so happens to be a Wildlife Refuge, hence the name A-rctic N-ational W-ildlife R-efuge) and this may account for part of why oil prices are high, it is by no means the only or prime factor involved.

Factor 1 - Production/Refining
Current US Oil Consumption = 20.7 million barrels/day
Current US Refining Capacity = 17.4 million barrels/day

And yet, we have fewer refineries now than we did in 1982 (149 today compared to 301 in 1982) and we have not built any new refineries since 1976. Why? Simple. They are too expensive. Refineries can take 10+ years to get permitted and built and can cost upwards of $3.5 Billion to build. With this type of time and capital expenditure, it could take 13+ years for a single refinery to become profitable. Companies just aren't wiling to do this.

With this being said, I would love for these "Drill Heads" to explain to me how we are going to refine all this "new oil" that we pull out of ANWR and other areas, when we already can not refine enough gasoline to meet our current needs. We are already importing refined oil as well as unrefined oil. Do they just want us to drill for more oil here in the US so we can then ship it to another country to be refined and then ship it back to the US for public use? Wouldn't this be costly as well?

Factor 2 - Non US Production
Most of us have probably also heard the occasional person blame OPEC for our current oil woes. While again, they certainly have an influence on oil prices (just as refining does) they are also only one of the factors involved. What most people don't know is that we actually import less than 50% of our oil from OPEC countries. In fact most recently it was 47.28%. Clearly production control over 47% of our oil will certainly affect our prices and I am by no means suggesting that it doesn't. What we fail to recognize is that we are not the only market they sell to, and as far as world demand goes, they have not had huge outcry from all of their purchasers to increase production. Additionally, they produce oil for profit, and if it were your business, why would you sell your product for less than what you could get for it? What can we do about it? Well, we could start buying more oil from Non OPEC countries that prove they are willing to sell us oil for less.

Factor 3 - The Open Market
As with other commodities like gold, oil is traded on the open market. You can trade oil and gasoline just like you can do with gold, stocks, and bonds. This also impacts our oil prices due to people expecting oil to become more and more valuable over time causing them to purchase this commodity, which in turn sends the price up. If we increase refining/production or reduce demand we could impact prices, but again we are not the only people wanting to buy and use gas and other oil products, so the amount of the impact is unknown.

Factor 4 - Inflation/Dollar Devaluation
As we all know, inflation has a major impact on the price of goods and services. Over the past 40 years, the US dollar has lost over 80% of it's purchasing power, meaning and item that cost you 16 cents in 1968 would cost you 1 dollar today. When you look at it from the perspective of 1 dollar it may not seem like much, if you look at from the perspective of a house, it is huge. Take for example my home. Today it costs $150,000 for my 3/2 suburban home but in 1968 it would have cost a mere $24,000. That's a pretty big difference, a $126,000 difference in fact. Overtime, as the dollar declines in value (or as inflation goes up whichever way you prefer to look at it) this raises the cost of what we buy. Gas in 1968 a gallon of gas cost about 34 cents/gallon. Today it costs an average of $4.02/gallon. If inflation were the only cause then gas would be around $2.15 - wouldn't we all love that! :)

Factor 5 - Oil Company Profits
I have also heard people on the left (my peeps) complaining that oil companies are to blame. The greed of these companies is the great unspoken evil of our time. While again corporate greed is a factor, it is by no means the main factor. When Bush took office in January of 2001 (technically February since he was not sworn in until the 20th of Jan) the price of oil averaged $29.00/barrel or $1.52/gallon for gasoline. Today oil closed at $134.86 per barrel or $4.02 per gallon. If you do a simple ratio on this, if oil companies increased their price per gallon at the same rate as the increase of oil prices then a gallon of gas would cost you $7.07. So, even though the Big Oil companies have been making record profit, they have not been increasing the price of gas at the same rate that the price of oil has been increasing. They have however, made quite a bit of money off of the other products derived form oil such as fertilizer.

All in all, I think it's fair to say that there are many factors involved in the increase of oil and gas prices. Every thing from demand to production, to the market and more. I write this to ask you to think about it more in depth the next time you hear any politician or pundit blame any one of these factors for our current situation. My suggestions? Try to shop smart for gas (not all gas stations are priced equally) and do your best to reduce your own dependence on oil. You could try to get a car that gets better gas mileage, or see if your boss will let you work from home, or work an alternative schedule like 4 ten hour days instead of 5 eight hour days, or take public transportation at least 1 day per week. I know that these suggestions are not feasible for everyone, which is why I believe that our only true recourse is to starting investing in/using alternate fuels.

Thanks for reading!

Don't believe me? Check it out for yourself:

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