Thursday, July 17, 2008

Propaganda About Oil and Gasoline Prices

Posted by bstotts

Recently, US citizens have been subjected to a barrage of Republican propaganda about oil prices and drilling in the United States. Democrats in Congress have managed to stand strong and not use high gasoline prices as an excuse to pillage our public lands for profit, but in the end some have also been guilty in remaining blind to certain facts about oil. And there is one simple fact that almost no one in Washington has the guts to tell voters: current oil prices are justified, prices will continue to rise, and there is very little they can do about it.

Here are some of the lies you have been told about oil:

1) Domestic drilling will reduce prices by increasing world supply

The main cause of rising oil prices is a simple supply and demand market issue. World supply is peaking while demand continues to rise, mostly in China. So, the easy solution would be to raise supply, right? The problem is we CAN’T.

US oil production peaked in the 1970s at 9.6 million barrels per day (MBpD), then had a secondary peak in the 1980s of 8.9 MBpD as the Prudhoe Bay Oilfield in Alaska reached its full capacity. Since then, US production has dropped to 5.1 MBpD and continues to decline rapidly as developed fields run out of oil. Republicans argue that drilling new fields, such as ANWR, the largest remaining undeveloped field in the US, will dramatically change this decline. In fact, the EIA estimates that ANWR production would peak at .78 MBpD in 2028. This peak would barely make up for the decline in the rest of the US and only level out overall production for a couple years.

If, in addition, we let the Republicans do everything they want, and open up both offshore drilling and drill every conceivable onshore field in the lower 48 states (such as the Roan Plateau), US production would increase to 6.3 MBpD around 2018. This would be an increase of 1.4% of world supply 10-20 years from now. This insignificant amount will not even make up for current estimates of increased demand. The EIA estimates this would lower world oil prices by about 75 cents a barrel, which would translate to 1-3 cents per gallon of gas, 10-20 years from now. In addition, these reductions are to 2020 prices, not current prices. So, if gasoline prices are $10/gallon in 2020 without drilling, they will instead be $9.97.

2) Pressuring OPEC will significantly reduce prices

Less than a decade ago, OPEC countries were running at less than 90% of their production capacity, deliberately reducing their supply to keep prices “higher” at $20/barrel and providing flexibility in the market. If prices spiked, they could increase supply significantly and reduce prices. Over the past 5 years, though, world demand has far outpaced increasing supply as world oil reserves have diminished. OPEC supply now runs at greater than 99% of capacity. Any slight increases OPEC could now make in supply will have little effect on prices… at most a couple dollars/barrel.

3) Speculation has driven long-term oil prices

As a commodity, oil can be bought as “futures” on the world market, fixing the current price as a hedge against future purchases. While this can have significant effect on short-term pricing, it has not been the cause of long-term rises in recent years. Oil futures still represent a real product consumed around the world on a global market. If the price of oil artificially rose beyond the actual consumer demand for it, the consumers would stop using it. As a result, the world would either see a drop in production or supply to match the drop in demand or a rise in unused inventory. From the discussions above, we already know that world supply has increased as much as possible, so there is no evidence of speculation there. In 2005-6, there was some evidence of a rise in US commercial oil inventories, and 2006 happens to be the year “speculation” first started to become a buzz word for oil price gains. However, throughout 2007, inventories dropped back down to near 30-year lows and in 2008 have also fluctuated near those lows while oil prices have continued to skyrocket.

To state this more simply… people around the world are willing to pay $140/barrel of oil and use it. This creates a real demand for oil at these prices, not a speculative one.

4) Adding refinery capacity will significantly reduce prices

Some Congressmen have started to point the finger at refinery capacity in the US as the culprit for rising gasoline prices, stating that a new refinery has not been built in 27 years. EIA data shows significant capacity has been added to older refineries and the US continues to run at around 85-90% capacity, a slight reduction from 10 years ago. However, this does not mean that Big Oil is without fault. Refining “costs” have risen from around 17.5 cents/gallon in 2002 to around 47.5 cents/gallon in 2007, raising profit margins from an historical average of average of 10% to more than 25%. Removing this profit would reduce gasoline prices 20-30 cents/gallon. Obviously, the price of oil quadrupling in the past 5 years has had more of an effect.

I may seem very cynical and the natural question arises, “What should the US do?” The answer is quite simple, but difficult for many to hear. We must STOP USING OIL. The technologies already exist today to build plug-in hybrid electric vehicles that get 90% of their energy from the electrical grid for short trips (estimates are that oversupply at night in our current grid could handle this need). For longer trips, we can power the last 10% on bio-diesel produced from algae or biomass byproducts. There is no doubt that it will be a huge effort to make this switch, and it will take years, but we may as well get started now because oil prices are only going to continue to climb.

No comments: