THE PROGRESSIVE CONSERVATIVE, USA
An Online Journal of Political Commentary & Analysis
Volume X, Issue # 68, March 9, 2008
Dr. Almon Leroy Way, Jr., Editor
Government Committed to & Acting in Accord with Conservative Principles
Ensures a Nation's Strength, Progress, & Prosperity
A PRIMER ON OIL PRICES
By Alan Caruba
THE PROBLEM OF ESCALATING OIL PRICES: HOW U.S. ENERGY POLICY FUNCTIONS AS A MAJOR CONTRIBUTOR TO
THE PROBLEM -- OTHER VAST FORCES AT WORK DRIVING UP THE PRICE PER BARREL OF OIL -- SPECULATION ON THE PART
OF HEDGE FUNDS & OTHER FINANCIAL INSTITUTIONS -- THE DECLINE IN THE VALUE OF THE DOLLAR AGAINST OTHER
CURRENCIES -- THE LACK OF PRODUCTION CAPACITY IN THE WORLD OIL MARKET -- INTERNATIONAL INSTABILITY &
PETROLEUM SHIPPING PROBLEMS -- NATIONALIZED OIL COMPANIES -- ARTIFICIAL SUPPLY CONSTRAINTS IMPOSED BY
OPEC
FULL STORY:
“The tripling of oil prices since the Summer of 2003 has unleashed forces that, within the next two or three years, will bring
oil prices tumbling back down to below $50 a barrel.” So said John Cassidy, writing about “The Coming Oil Crash” in the
January, 2008, issue of Conde Nast Portfolio. Yes, the price of oil will come down, though no one knows exactly
when. It has topped $100 a barrel, and there are indications it could go higher.
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:
“In the past four years, Exxon Mobil, the world’s largest
oil company, has invested more than $60 billion in
exploration and development. Between now and 2010,
the company plans to begin pumping oil or gas from no
fewer than 20 new projects.”
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:
“The world produces about 85 million barrels of oil a day,
according to the International Energy Agency. Global
energy demand is expected to rise 55 percent from 2005
to 2030.”
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.
LINKS TO RELATED TOPICS:
Political Economy -- Philosophies, Systems, & Public Policies:
Government, the Economy, & Economic Prosperity
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.
© Alan Caruba 2008
Published with Permission of Alan Caruba
ACaruba@AOL.Com
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THE PROGRESSIVE CONSERVATIVE, USA
An Online Journal of Political Commentary & Analysis
Dr. Almon Leroy Way, Jr., Editor
Conservative & Free-Market Analysis of Government, Politics & Public Policy, Covering Political, Legal, Constitutional, Economic,
Cultural, Military, International, Strategic, & Geopolitical Issues
Conservative Government Ensures a Nation's Strength, Progress, & Prosperity