When President Obama took office, regular gasoline cost $1.85 a gallon. Now its hit $4.00 per gallon in many cities, and some analysts predict it could reach $5.00 or more this summer. Filling your tank could soon slam you for $75-$90.
This winter was warm. Our economy remains weak. People are driving less, in cars that get better mileage, even with mandatory 10% ethanol. Gasoline is plentiful. Misinformed politicians and pundits say prices should be falling. They claim our pain at the pump is due to greedy speculators and greedier oil companies that are exporting oil and refined products.
Their explanation is superficially plausible – but wrong.
Energy Information Administration (EIA) data show that 76% of what we pay for gasoline is determined by world crude oil prices; 12% is federal and state taxes; 6% is refining; and 6% is marketing and distribution. Global markets set the price that refiners pay for crude oil.
World prices are driven by supply and demand, and unstable global politics. That means today’s prices are significantly affected by expectations and fears about tomorrow.
A major factor is Asia’s growing appetite for oil – coupled with America’s refusal to produce more of its own petroleum.
Prices are also whipsawed by uncertainty over potential supply disruptions, due to drilling accidents and warfare in Nigeria; disputes in Syria, Yemen and Israeli-Palestinian territories; erroneous reports of a pipeline explosion in Saudi Arabia; concern about attacks on Middle East oil pipelines and processing centres; and new Western sanctions on Iran over its nuclear program and the mullahs’ threats to close the Straits of Hormuz.
Amid this uncertainty and unrest, speculators try to forecast future prices and price shocks, pay less today for crude oil that could cost more four weeks hence, and get the best possible price for clients who need reliable supplies. When they’re wrong, speculators end up buying high, selling low and losing money. Oil speculators play a vital role, just as they do in corn and other commodities futures markets.
Today demand competes for oil instead of supply competing for buyers.
Moreover, oil is priced in US dollars, and the Federal Reserve’s easy money, low interest policies called quantitative easing – combined with massive US indebtedness – have weakened the dollar’s value. It now costs refineries more dollars to buy a barrel of crude than it did three years ago.
Compared to safe haven currencies like the Swiss franc the dollar is down by 35% in three years. Oil for those with strong currencies seems cheap.
US Dollar vs Swiss Franc 2007 to Mar 2012
Basic chemistry dictates that a barrel of crude (42 gallons) cannot be converted entirely into gasoline. Depending on the type of crude, some 140 refineries across the USA transform each barrel into gasoline, diesel, and jet fuel, heating oil, asphalt, waxes, petrochemicals and other essential products.
This manufacturing process leaves them with excess diesel fuel, because American vehicles consume less diesel than refineries produce – due to air pollution laws that limit diesel use. US refineries export that excess diesel to Europe, which uses more diesel than gasoline, and Europeans ship their surplus gasoline to mostly East Coast consumers. US refineries also sell excess inventories of other manufactured products to overseas markets, but diesel is by far their principal export.
America exports $180 billion in finished products every month – $2.2 trillion annually in corn, wheat, cars, tractors, appliances, airplanes, pharmaceuticals and much more.
Last year, for the first time since 1949, America was a net exporter of fuel and other petroleum products. Those exports injected $107 billion into our economy and sustained thousands of refinery and other jobs that otherwise might have been lost, as refineries also struggled in our stagnant economy.
Farm and factory jobs would evaporate if we made exporting their products illegal. Prohibiting fuel exports, and demanding that refineries manufacture only what we need here in the States, would have the same effects on our employment, economy and living standards.
The USA has 1.4 trillion barrels of technically recoverable conventional oil, the EIA and other experts estimate, and enormous additional supplies in shale and tight sand deposits. The best way to keep prices down is to produce more of this American oil, and import more from secure, friendly, nearby suppliers like Canada.
However, our government prohibits leasing and drilling on nearly 95% of the onshore and offshore lands it controls. It is dragging its feet on leases and permits for the remaining 5% and over-regulating production on private lands. It vetoed the Canada-to-US Keystone XL pipeline. It is imposing layers of costly and unnecessary new regulations on every aspect of energy production it does not simply reject.
All these government policies impact the price we pay at the pump.
We are losing billions of dollars in bonus, rent, royalty and tax receipts, killing countless jobs, and impairing Americans’ living standards, health and welfare.
“More exports mean more jobs,” President Obama said recently. “We need to strengthen American manufacturing. We need to invest in American-made energy and new skills for American workers.”
His words ring hollow. Above all, President Obama and his environmentalist and congressional allies want to end our “addiction” to oil, “fundamentally transform” America, and “invest” billions of dollars (borrowed from us and our children and grandchildren) subsidizing efforts to turn corn, switchgrass, algae and pond scum into fuel.
Generating billions of dollars and millions of real jobs by producing American oil and manufacturing American oil products doesn’t fit this agenda. Even though one of every ten jobs created in the last three years has been in oil and gas, when it comes to petroleum, Team Obama wants to punish success, and reward failures like Solyndra, Fisker and the Chevy Volt.
To paraphrase a recent White House jab at Republicans who want more drilling and fewer obstructionist regulations: Every time prices start to go up, President Obama heads down to the local pond or cornfield, makes sure a few cameras are following him, and starts acting like he can wave a magic wand, throw a few more billions around, and have cheap, eco-friendly biofuels forever.
Meanwhile, Energy Secretary Steven Chu has made it abundantly clear that he wants to “boost gasoline prices to European levels” – $8 to $10 per gallon! He’s already half way to his goal.
Those prices would certainly force Americans to drive less, and “hope” the hype about “changing” to algae-gas becomes reality in less than twenty or thirty years.
Meanwhile, skyrocketing fuel prices will certainly “boost” the cost of transporting people, raw materials, food and products by wheels, wings and waterways; manufacturing anything still made in America; and preserving jobs, family and business budgets, and dreams that depend on affordable energy.
Hunting for scapegoats won’t lower pump prices. Reality-based energy policies will.
By. Paul Driessen
Mr. Driessen is senior policy advisor for the Committee For A Constructive Tomorrow and Congress of Racial Equality, and author of Eco-Imperialism: Green power – Black Death.
Mr. Driessen covered the major points with aplomb. The few remarks that seem a bit overboard disparage the alternative fuels. We all know the alternatives are going to need to face petroleum head on by price. The few remarks that seem weak don’t pound the current administration hard enough for their complicity in the situation. Mr. Driessen completely ignors the mainstream press overlooking the situation and informing people in and honest and straightforward way.
The hard fact is the devalued dollar is the principle driver of the high price of crude oil products for Americans.
Source: Why Gasoline is Expensive
Cheap oil is in terminal decline; I believe peak oil has been reached, and increasingly we must replace older wells with oil from more challenging sources (think Tupi off the coast of Brazil that is over 7 miles below the surface. Deep water Horizon was nothing compared to getting oil out of Tupi)
Demand for oil is rising not just in places like China and India, but also in oil producing nations of the Middle East and Venzuela. In fact, as oil prices rise, oil producing nations can make money and keep more for domestic use. Do you still think skiing in Abu Dhabi is so cool? That's oil kept out off the world market.)
The article does do a nice job of explaining how quantitative easing has made gasoline more expensive for Americans but not so for everyone.
If "speculators" are paying too much for oil right now, then the price will come down and they will get burned. But we've seen sustained high oil prices even in a world wide economic downturn. If there was a true recovery, higher oil demand would push oil prices even higher.