High Gas Prices and Who’s to Blame

April 22, 2006 | Justin

Now is the summer of our discontent. Yesterday oil closed at over $75 a barrel which is the highest it has ever been. Sure, it’s less then it was in the late 70’s and early 80’s when you adjust for inflation, but that’s all semantics. This is translating to a national average price for a gallon of gas approaching $3 and unfortunately it looks like the prices will continue to climb. So who is responsible for the high prices? Will they ever come back down? Let’s break it down.

Foreign Governments
One of the largest factors that raise our oil prices are foreign governments — and particularly their instability. Some of the largest oil producing countries are beds of international turmoil. Nigeria’s oil rich region has been captured by rival warlords who want a share in the countries oil wealth. There is Venezuela who’s extreme leftist president isn’t too fond of America and need I even mention Iran? Their president has threatened stop the exportation of oil if they are sanctioned by the United Nations. And then there is China. While it is not exactly their government that is causing the price of oil to rise but their increased prosperity. In the last few years China has jumped out of nowhere to the second most oil demanding country in the world — behind the US.

Dwindling Supply
Partially because of China’s increased demand, as well as other countries refusal to cut back (including our own), oil supplies are all but gone. If you have ever taken an economics course then you know the principle of Supply and Demand. When there is high demand and little supply the price of a product goes up. Well there you go. There is very little oil and very high demand — almost to the point where there is more demand then supply. When we reach that point and there are massive shortages around the world, the price of oil will be set by whichever country is willing to pay the most for it.

Environmental Lobbyists
Fortunately for us, we’re not to that point yet. In fact, we have enough unrefined oil to sustain us. The problem here in America is that we can’t refine it quick enough. There are only ten oil refineries in the United States. Experts have said that to adequately supply refined oil (gas, home heating, etc) to the country we would need somewhere around five times that number. Why don’t we have more refineries then? Why was the last one built in 1976? Well environmental legislation — proposed and supported by the lobbyists — have put a stranglehold on the industry, making it almost impossible to open new refining plants. There are other laws that have passed which favor the environmental groups and thus raise the price of oil as well. One such is the new ethanol fuel additive law which has been enacted in a number of states. The problem is that, while ethanol is cleaner burning and doesn’t hurt ground water, it dissolves in water. So, unlike the current additive, it can’t be piped from its point of origin to the refineries. It has to be trucked or delivered by train. Since both of these transport methods are slow and rely on the price of gasoline, can you see the catch-22 it presents?

Big Oil
Now I don’t want you getting the idea that I’m anti-environment and pro big oil because that isn’t exactly the case. Big oil is as much to blame as the environmentalists. Big oil has refused to explore cleaner, cheaper methods of fuel production and at the same time are making profits the likes of which no company has ever seen. Billion dollar profits when gas prices are through the roof? Something doesn’t seem right. Senator Charles Schumer (D - NY) has raised the question that perhaps big oil is gouging the American public. While his proposal is more then likely an election year statement, it probably has some validity. Oil refining on the whole is at about 85% capacity right now. Big oil claims this is due to needed repairs stemming from last years hurricane season. Despite their record profits, I can guarantee that the price of those repairs is built into the price of a gallon of gas. It’s no wonder the former Exxon CEO recently walked out the door with a $150 million retirement package.

Politicians
Every US senator, congressmen, and president in the last thirty years is equality to blame. Laws could have been passed requiring big oil to start researching cleaner, cheaper, and more abundant fuel sources. Thirty years ago Brazil’s government passed such a law and by the end of next year they will be 100% oil independent. Our government chose not to pass such legislation. In fact, last year Congress had a chance to finally hold big oil accountable. The CEO’s of the five largest American oil companies were called into a hearing in the Senate. While the idea sounded good, the CEO’s were never sworn in and absolutely nothing was accomplished. It was really just a big political stunt.

Oil Traders
The price of oil is controlled largely by future traders. They have bid the price of oil from roughly $20 a barrel in 2002 to it’s current record price of $75 and change. Traders say that the increase in price is due to a number of factors — most of which we looked at above. While the traders are right, it isn’t that cut and dry. The traders are also to blame. Oil is traded based on speculation and the traders speculate that the world (particularly oil producing countries) is fixing to go to hell in a hand basket. Because of this speculation, the price of oil is bid up. Yesterday, for instance, where oil hit an all time high, the price was bid up higher then it probably should have been in an effort to cover any potential weekend changes in the geopolitical atmosphere. Oil isn’t traded over the weekend so the traders bid the price up, just in case. Make’s sense right?

Ok, let’s take a quick break to look at just who we have to blame for our high fuel costs so far. We’ve got instability of oil rich nations and insane foreign leaders who control the means of production. We’ve got an extreme lack of supply spurred by increased world demand and our own countries inability to refine what supply we do have. We’ve got environmentalists and politicians to blame for that. We’ve got big oil who seems to think change is a bad thing and is making record profits off their stranglehold of the American people. We’ve got oil traders who seem to bid up the price of oil when a fuel tanker catches a flat tire en route to a service station. Is that it? Did I cover everyone? Well, not quite. I’ve got to take that finger of blame and turn it around.

Us
That’s right, you and I are to blame as well. Despite the extreme prices at the pump and in our electric bills, are we doing anything to conserve? Nope. Do we give into the fear that the supply will soon vanish and fill up our tanks and gas cans “just in case?” Yep. The argument can be made that we can’t just stop using gas and that’s true, but we can cut back. We can keep lights off, group errands together, not give into ever idiot on TV who says that there will be disruptions so go fill up now. We can use websites like Gas Buddy to find the cheapest gas and tell big oil that we’re not going to just take what is given to us. We can write our politicians and tell them we’re not going to allow them just standing ideally by smiling at the cameras. We can do what we can to reduce our individual demand.

So who is to blame for our high oil and gas prices? Well, everyone really. The fact is that oil will continue to rise, possibly to $100 a barrel by the end of the summer which translates to somewhere around $5 a gallon at the pump. As scary as that might sound, the prices will continue to rise until something is done and unfortunately, that something has be lead by us. We each have to do what we can and hope that our government, big oil, and the traders follow in line.

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