April 20, 2004
Gasoline prices & finger-pointingBy Dan Berard
Gasoline prices are up again and fingers are pointing in many different directions. Energy problems are a fundamental challenge for America. The short term spike in retail prices at the pump is only a foretaste of serious disruptions ahead, unless tough choices, informed by realistic perspectives, are made.
Higher gasoline prices are everyone's concern because of their direct effect on the economy. Everything we purchase has the price of gasoline built into its cost. The higher gas prices we pay today may be only a hint of what is to come.
American gasoline is still 'cheap' compared to most other industrial countries. The DOE recently estimated that the cost components of a gallon of gasoline include 26% taxes, 9 % distribution & marketing, 19% refining and 46% crude oil. Europeans pay $3.50 per gallon or so, and most of the difference in price level is accounted for by higher taxes.
The crude oil portion of gasoline's cost is driving retail prices up right now. OPEC recently decided to reduce production by one million barrels (4%) leading into the peak summer months. OPEC producing countries have been enjoying oil prices above $30 per barrel, pushing their economies upward, and they would like to keep prices higher for as long as they can. Keeping supplies tight tends to keep prices up.
The Saudis took a leadership role in the last OPEC meeting, encouraging restraint in crude oil production, because 'there is plenty of oil on the market' according to Ali al—Naimi, the Saudi Oil Minister. Adel al—Jubeir, spokesman for the Saudi Embassy and foreign adviser to Saudi Crown Prince Abdullah in Washington, issued a statement telling us that crude oil production and demand 'are in balance' and that the real problem is lack of refining capacity, noting that we haven't built a refinery in the last 20 years.
The comments from the Saudis are indisputably accurate, as far as they go. But they do not begin to answer the core problems with the US energy outlook. We have allowed ourselves to become dependent on OPEC without developing our own plan to accommodate consumption growth. We are so dependent on OPEC that its tactical decisions which affect price or production volumes can send our markets into a spin.
Gasoline prices have already become a political issue in the Presidential campaign. The Saudis may even be attempting to defeat President Bush, whom they regard as having betrayed them, by inflicting pain on consumers and slowing our economic growth, via oil price hikes. Recently, controversy has broken out over allegations of a deal between the Bush Administration and Saudi Arabia, to lower oil prices before the election. Both sides deny any deal. Interestingly, prices fell sharply last summer and increased near yearend. There is an obvious seasonality to crude oil and gasoline prices, so it is easy to make claims that someone is pulling the strings.
Senator Kerry certainly has attempted to gain electoral advantage, by creating a so—called 'misery index' which gives a prominent place to retail oil prices. Some have called for 'getting tough' with OPEC, whatever that means. But the stupidest suggestion so far is that the DOE should open our Strategic Petroleum Reserves (SPR) and sell cheaper oil to reduce current gasoline prices.
It is ridiculous to think that a temporary rise in gasoline prices warrants using our strategic reserves. The SPR was created 30 years ago by the Energy & Conservation Act of 1975, in the wake of the Arab crude oil embargo. Up to one billion barrels are authorized to be stored in the SPR. Protecting the nation's ability to function during a war or some other national emergency was the intended purpose for the SPR. The U.S. Department of Energy (DOE) currently maintains a maximum of 700 million barrels in the stockpile. This oil is stored in salt domes in the Gulf Coast areas of Louisiana and Texas.
We now import about 10 million barrels a day (10MM Bbls/day, in industry shorthand), so 700 million barrels would not move the market price for oil very much, for very long. According to one recent estimate, a partial sell—off of the SPR would only reduce gas prices by a few cents. If we expended our reserves in this way, what would we do in case of a real emergency?
Any approach to resolving our current energy problems, and building a stable and reliable base for the economic future of the country must take account of some hard facts.
Our 149 refineries operate at over 95% capacity, so small disruptions are a problem. The many designer blends required means that it may not be possible to ship new supplies in from adjacent states, if the gasoline blends there differ, as is often the case.
Our crude oil production has dropped to 5.7 MM Bbls/day from the 1970 high of 9.1 MM Bbls/ day. As consumption has increased, imports must account for not only the drop in production, but for all increased usage.
Consumption of natural gas has exceeded annual production for almost 10 years and proved reserves of 183 trillion cubic feet offer only a ten—year supply. We also import natural gas to keep up with demand.
The most frightening statistic is that the U.S., with only 5% of the world's population, consumes 20% of world oil production. It is quite clear that low energy prices at home will only feed the growth this pattern of oil consumption. Further, global demands will increase the competition for energy resources since fuel is required to support the rapid economic development of nations like China, and Eastern European countries.
We, therefore, conclude that we must take effective action promptly to avoid placing our economic and national security status in serious jeopardy.
Some think all we have to do is conserve more, but conservation cannot realistically hope to do anything but slow the growth of consumption. Thanks to the immigration—fuelled rise in our population, even a substantial rate of decline in per capita use of energy will not decrease overall consumption. And, thanks to our hunger for computers, cars, air—conditioning, single family detached houses with ample land, home entertainment systems, sophisticated medical equipment, and almost everything else we consume, per capita consumption of energy is unlikely to decline very much, if at all.
The simple fact is that we do not yet have an effective energy policy. We cannot point fingers at OPEC, we cannot blame 'big oil,' and we cannot blame President Bush. This problem has been building for more than two decades, so we can hardly blame anyone but ourselves.
We surrendered to cheap oil imports a long time ago, and then let the environmentalists dictate policy and intimidate the politicians that now pander to them. Now we are paying the price. There is no question that strong conservation measures would help the oil deficit, but we need more robust and reliable solutions than just efficiency steps. As a practical matter, the solutions we develop must have adequate protection for our environment, but they must also demonstrate reasonable economics and have a rational planning basis.
We can easily demonstrate the mentality that lead to America being hostage to oil imports by looking at the energy policy offered by the environmentalists. The Natural Resources Defense Council calls it the 'Responsible Energy Policy...' mainly because it was written by a group of lawyers and scientists who never worked in the energy business.
This group defines 'responsible' with the following key recommendations:
... we should not use the countries' vast coal reserves
... we should not drill and produce oil
... we should use natural gas to 'bridge' to the future with renewable energy.
... we should require tires to be fuel efficient as the original tires
... we should not drill in the Artic National Wildlife Refuge
... we should not drill offshore areas in Alaska & Gulf of Mexico
... we should reject new subsidies for 'clean coal' & nuclear power.
... we should raise fuel standards to 39 mpg on new cars, SUV's & light trucks
... we should expand programs to weatherize low—income Americans' housing & help pay their energy bills.
... we should depend on renewable energy sources (solar, wind, etc) that are clean energy resources.
They call this 'responsible oil policy'?
They do not mention any costs to the consumers except to say that the government should help with energy bills.
They do not mention how we are to find all the natural gas we will burn in the 1300 new power plants we need. We already import natural gas to satisfy consumption.
They do not mention the impact on our economy when we get rid of all the jobs in the energy business. Or, for that matter after we convert all the power plants that now burn coal and start burning natural gas. This plan ignores the fact that natural gas prices has now risen so much that many power plants originally installed with gas are now using coal again. Coal and natural gas compete at around $3.00 per million BTU's. The current price of natural gas over $5.00 per million BTU's makes this option non—competitive.
They do not address how we will develop the renewable energy sources, or for that matter, when they might be robust enough to handle our national needs.
This is not a credible policy or a plan; it is wishful thinking. Even if you like the conservation steps, how can anyone get behind a plan with no economics?
What do we do?
We need to think about long—term energy requirements, because it takes years to make big changes. Short—term gasoline price spikes are really warning signals. We should treat the disease, not the symptoms.
We need to make smart choices so we use the resources we have in a responsible way. For example, the US coal reserves are the largest in the world and provide the US with cheap electricity. Our main problem is that we need technology to help us with undesirable emissions. Tremendous progress has been made, but much more research and development could yield more desirable and economical approaches to making our most abundant energy source cleaner.
We need to approach our energy related technology issues in a comprehensive way. For example, it is not clear that we have reached a high enough oil price to justify new investments in alternative energy sources. Also, why should we wait for new technologies to emerge? Why not just go after them and sponsor projects to test them?
We must think about how we educate the American public. It makes no sense to beat around the bush (no pun intended), or be silent about the critical nature of our energy problem. The current administration should mount a campaign to educate everyone, and push back the fantasies promoted by the environmental groups. It would take guts to do this in this election year. But nobody said the responsibilities of a President rest easily on his shoulders. We are facing a crisis in slow motion.
Dan Berard was trained as a geophysicist, and spent his early career in the oil & gas business as an exploration seismologist with Chevron Oil Company, and later as a technology executive with Exxon Corporation. He has managed several of the largest computing organizations in the world supporting the oil business, working all over the world. Since retiring from the oil industry, he has consulted on technology planning, business planning, and technology management. He is The American Thinker's energy correspondent.