A Big Oily Mess (Revised!) Part I: Understanding High Fuel Prices
While most Americans are anxious about rising fuel costs, and all Americans are impacted by the increased price for oil, the reasons for the quick rise in the price of a barrel of crude since 2004 are many and complicated.
One of the most pressing factors in the oil crisis is that oil is traded on U.S. currency. What's this mean? That it's bought and sold on a dollar rate, as opposed to pounds sterling, euros, or yen. When the dollar declines in value, as it has declined in value over the last several years, it takes more dollars to buy a barrel of oil, and that translates into higher prices at the pump. The declining value of the dollar, based on factors ranging from deficit spending to increased entitlement payouts to the chaotic stock market, means that Americans have been hit harder by the increased price of oil relative to other countries that have enjoyed steady currency values. This is further complicated by the recent slowing of American economic growth, which has compelled oil speculators to invest in oil futures as a "sure thing." The result of this set of controls is that the actual American demand for oil is perceived as disproportionately drastic by Americans.
Contrary to popular belief, sport utility vehicles are not part of the problem. Automobiles account for a minor share of American fuel consumption. Demand for oil in the form of gasoline has decreased in the last several years, a result of the free market's impact on demand. Given that most Americans see automobiles working on a regular basis, it's easy to conclude that motorists are the problem. However, what most Americans don't realize is that petroleum-based energy generation is the source of most of America's electricity. In addition, industrial and manufacturing operations use petroleum-based lubricants make up for a substantial fraction of America's overall demand for oil. Also, plastic is in greater and greater demand globally for a wide range of products, and the plastic requires oil as a primary ingredient. While it's easy to blame motorists, America's increased demand for electricity and manufactured goods are bigger factors in the increased demand for oil.
The price of oil is increased through two bottlenecks: supply, and refinement capacity. While oil is found in many areas of the world, a number of these locations are either difficult to locate or exploit (like undersea fields), or in unstable areas (like the Middle East). Contrary to popular belief, most of the oil consumed by America does not come from the Middle East; in fact, America imports more oil from neighboring Canada than it does from anywhere else. Even so, a notable amount of American oil comes from places like Saudi Arabia, Nigeria and Venezuela. Not only are several oil-producing nations prone to supply and transport delays caused by violence or other instability, but many of these countries actually refine the oil they produce, turning it from crude into end products like diesel, gasoline, or lubricants. The United States has not constructed a new oil refinery since the Carter Administration. As a result, America is dependent upon oil exporting countries not only for oil, but for refined oil. Both of these needs impact the overall supply and cost of oil for American consumers and industries. Another factor is the price manipulation by OPEC. Gone are the days of the late 1970s oil embargo, but OPEC still influences prices by putting limits on both the production and refinement of crude oil. Other entities, like Russia and Venezuela, have been known to either threaten or make good on threats to increase the price for their oil supplies; and the deteriorating stalemate with Iran, an oil producer and a neighbor to oil producers, hasn't helped.
As controversial as it is to question the wisdom of ethanol production, it's worth noting that ethanol is part of the reason for increased oil prices. This may seem counterintuitive, but the process of creating ethanol requires the expenditure of nearly as much petroleum-based fuel as is created by the ethanol process. Most service stations in the United States now incorporate a percentage of ethanol in every gallon of gasoline. That constitutes a large quantity of ethanol, and when one considers that nearly the same amount of gasoline is burned in the production process, and the longer and more complicated process of producing combination gasoline-ethanol results in a higher overall production cost, it's easy to see why the increased production of ethanol has failed to reduce the price of petroleum.
While the American demand for global petroleum supplies has remained relatively constant, and even declined in some sectors, the global demand for oil has increased. A great deal of this increase results from the recent industrialization, on a massive scale, of both China and India, though these are just two examples. As it is in America, so it is in China and India: increased industrialization means an increased need for electricity, lubricants, oil as an ingredient in various manufactured goods, and the like. Increased prosperity in these nations also results in an increased demand for individual users, whether for cars, or products, or electricity.
These are just a few of the major factors in the increase in petroleum prices since 2003-04. As complex as the issue is, no single "silver bullet" solution exists, and only one or two alterations in the overall picture can produce dramatic changes in the prices Americans experience. he next installment will explore a few of the proposed solutions that will either fail to solve the issue, or even impact it negatively.
One of the most pressing factors in the oil crisis is that oil is traded on U.S. currency. What's this mean? That it's bought and sold on a dollar rate, as opposed to pounds sterling, euros, or yen. When the dollar declines in value, as it has declined in value over the last several years, it takes more dollars to buy a barrel of oil, and that translates into higher prices at the pump. The declining value of the dollar, based on factors ranging from deficit spending to increased entitlement payouts to the chaotic stock market, means that Americans have been hit harder by the increased price of oil relative to other countries that have enjoyed steady currency values. This is further complicated by the recent slowing of American economic growth, which has compelled oil speculators to invest in oil futures as a "sure thing." The result of this set of controls is that the actual American demand for oil is perceived as disproportionately drastic by Americans.
Contrary to popular belief, sport utility vehicles are not part of the problem. Automobiles account for a minor share of American fuel consumption. Demand for oil in the form of gasoline has decreased in the last several years, a result of the free market's impact on demand. Given that most Americans see automobiles working on a regular basis, it's easy to conclude that motorists are the problem. However, what most Americans don't realize is that petroleum-based energy generation is the source of most of America's electricity. In addition, industrial and manufacturing operations use petroleum-based lubricants make up for a substantial fraction of America's overall demand for oil. Also, plastic is in greater and greater demand globally for a wide range of products, and the plastic requires oil as a primary ingredient. While it's easy to blame motorists, America's increased demand for electricity and manufactured goods are bigger factors in the increased demand for oil.
The price of oil is increased through two bottlenecks: supply, and refinement capacity. While oil is found in many areas of the world, a number of these locations are either difficult to locate or exploit (like undersea fields), or in unstable areas (like the Middle East). Contrary to popular belief, most of the oil consumed by America does not come from the Middle East; in fact, America imports more oil from neighboring Canada than it does from anywhere else. Even so, a notable amount of American oil comes from places like Saudi Arabia, Nigeria and Venezuela. Not only are several oil-producing nations prone to supply and transport delays caused by violence or other instability, but many of these countries actually refine the oil they produce, turning it from crude into end products like diesel, gasoline, or lubricants. The United States has not constructed a new oil refinery since the Carter Administration. As a result, America is dependent upon oil exporting countries not only for oil, but for refined oil. Both of these needs impact the overall supply and cost of oil for American consumers and industries. Another factor is the price manipulation by OPEC. Gone are the days of the late 1970s oil embargo, but OPEC still influences prices by putting limits on both the production and refinement of crude oil. Other entities, like Russia and Venezuela, have been known to either threaten or make good on threats to increase the price for their oil supplies; and the deteriorating stalemate with Iran, an oil producer and a neighbor to oil producers, hasn't helped.
As controversial as it is to question the wisdom of ethanol production, it's worth noting that ethanol is part of the reason for increased oil prices. This may seem counterintuitive, but the process of creating ethanol requires the expenditure of nearly as much petroleum-based fuel as is created by the ethanol process. Most service stations in the United States now incorporate a percentage of ethanol in every gallon of gasoline. That constitutes a large quantity of ethanol, and when one considers that nearly the same amount of gasoline is burned in the production process, and the longer and more complicated process of producing combination gasoline-ethanol results in a higher overall production cost, it's easy to see why the increased production of ethanol has failed to reduce the price of petroleum.
While the American demand for global petroleum supplies has remained relatively constant, and even declined in some sectors, the global demand for oil has increased. A great deal of this increase results from the recent industrialization, on a massive scale, of both China and India, though these are just two examples. As it is in America, so it is in China and India: increased industrialization means an increased need for electricity, lubricants, oil as an ingredient in various manufactured goods, and the like. Increased prosperity in these nations also results in an increased demand for individual users, whether for cars, or products, or electricity.
These are just a few of the major factors in the increase in petroleum prices since 2003-04. As complex as the issue is, no single "silver bullet" solution exists, and only one or two alterations in the overall picture can produce dramatic changes in the prices Americans experience. he next installment will explore a few of the proposed solutions that will either fail to solve the issue, or even impact it negatively.
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