The Worldwide Price of Oil

Every day the American consumer is barraged by news reports concerning the cost of gasoline.  Environmentalists and progressives argue against drilling for oil and encourage the use of green technologies.  They hope for growth in this industry and the creation of many new technology jobs.  The President has routinely expressed the view that opposition to this industry is analogous to the Flat Earth Society arguing against the Columbus voyage of 1492.  Whether such a group existed may be debated.   However, the significance of the opposition to the government selecting companies receiving financial support is critical.  It forms the dividing line between the left and right political views on the appropriate role of government in the private sector.

The news media and politicians have purposely and falsely conflated two different products and services:  crude oil and refined gasoline.  Why have they done this?  This confuses the issue in the minds of many citizens.  Firstly, we must recognize that there is a world-wide price for crude oil, usually denominated in quantities of barrels.  Today the price for this commodity is about $106 per barrel.  Citizens do not buy crude oil, but refined gasoline, denominated in gallons, and other processed derivatives.  The national average for regular unleaded gasoline to power an automobile is presently about $3.88 per gallon.  This is approximately 110% higher than on the date the President took office in 2009.  So what does all this mean?

Gasoline prices vary by the gas station selling the commodity, location of the retailer, and the community and state in which the commodity is sold.  The contributors to the cost of refined gasoline include transportation of the product through pipelines, trucking it over the road, the process of refining the crude oil (with the many different formulations required in different communities and during the differing seasons), lag times for processing, shortages of refining capacity due to environmental restrictions, company profits and costs of labor at all levels of the process, taxes at the local, state and federal levels, competition at the retail level, as well as reaction to spikes or drops in the world-wide price of oil.  In Canada, the gallon is larger and therefore results in a higher price.  In Europe, the cost per gallon averages over $8.

The world-wide price of oil is influenced by supply in the many producing countries.  Most discussion centers on the Middle East sources, but the U.S.A. imports most of its oil from Canada, not Saudi Arabia.  Many discussions about drilling confuse recovery from federal lands, which is lower today than three years ago, with private lands, which is up over three years ago.  Pointing fingers at guilty parties adds more confusion and does not solve the energy problem or lower the cost to consumers.  We can all agree that oil is not clean, that some oil companies have taken the opportunity to enrich themselves at the expense of consumers, that government taxes have raised the cost of gasoline extensively, and that gasoline taxes have not always been used effectively to improve our roads.  Yet, it is curious that some politicians call for increased taxes upon oil companies as a way of lowering the cost of gasoline at the pump. 

In 2008, at the end of the Bush administration, the Congress passed legislation allowing more off-shore drilling which resulted in a significant drop in the price of crude oil.  At the time, Saudi Arabia also increased production further depressing the price.  Clearly, we should encourage development of alternative sources of energy including geothermal, wind, solar, hydroelectric and possibly nuclear.  However, for the foreseeable future we will require petroleum products to power our cars, generate electricity, create plastic products, and ensure factory employment.  It is essential to give the populace honest information, no matter what the biases of the media.

The use of taxpayer money to determine which technologies and companies will be supported is a disruption to the private capital markets.  It has resulted in many failures such as Solyndra and is fraught with opportunity for corruption.   This move toward socialism is an essential difference between the political parties.  It is one thing to support research into technologies at the basic science level, but wholly different to then pick which company to encourage.  The risk of corruption outweighs the potential of any benefit.  The private sector is not perfect, but allows greater opportunity for a profitable technology.  At least the outcome will be a voluntary success and not a coerced one.

Every day the American consumer is barraged by news reports concerning the cost of gasoline.  Environmentalists and progressives argue against drilling for oil and encourage the use of green technologies.  They hope for growth in this industry and the creation of many new technology jobs.  The President has routinely expressed the view that opposition to this industry is analogous to the Flat Earth Society arguing against the Columbus voyage of 1492.  Whether such a group existed may be debated.   However, the significance of the opposition to the government selecting companies receiving financial support is critical.  It forms the dividing line between the left and right political views on the appropriate role of government in the private sector.

The news media and politicians have purposely and falsely conflated two different products and services:  crude oil and refined gasoline.  Why have they done this?  This confuses the issue in the minds of many citizens.  Firstly, we must recognize that there is a world-wide price for crude oil, usually denominated in quantities of barrels.  Today the price for this commodity is about $106 per barrel.  Citizens do not buy crude oil, but refined gasoline, denominated in gallons, and other processed derivatives.  The national average for regular unleaded gasoline to power an automobile is presently about $3.88 per gallon.  This is approximately 110% higher than on the date the President took office in 2009.  So what does all this mean?

Gasoline prices vary by the gas station selling the commodity, location of the retailer, and the community and state in which the commodity is sold.  The contributors to the cost of refined gasoline include transportation of the product through pipelines, trucking it over the road, the process of refining the crude oil (with the many different formulations required in different communities and during the differing seasons), lag times for processing, shortages of refining capacity due to environmental restrictions, company profits and costs of labor at all levels of the process, taxes at the local, state and federal levels, competition at the retail level, as well as reaction to spikes or drops in the world-wide price of oil.  In Canada, the gallon is larger and therefore results in a higher price.  In Europe, the cost per gallon averages over $8.

The world-wide price of oil is influenced by supply in the many producing countries.  Most discussion centers on the Middle East sources, but the U.S.A. imports most of its oil from Canada, not Saudi Arabia.  Many discussions about drilling confuse recovery from federal lands, which is lower today than three years ago, with private lands, which is up over three years ago.  Pointing fingers at guilty parties adds more confusion and does not solve the energy problem or lower the cost to consumers.  We can all agree that oil is not clean, that some oil companies have taken the opportunity to enrich themselves at the expense of consumers, that government taxes have raised the cost of gasoline extensively, and that gasoline taxes have not always been used effectively to improve our roads.  Yet, it is curious that some politicians call for increased taxes upon oil companies as a way of lowering the cost of gasoline at the pump. 

In 2008, at the end of the Bush administration, the Congress passed legislation allowing more off-shore drilling which resulted in a significant drop in the price of crude oil.  At the time, Saudi Arabia also increased production further depressing the price.  Clearly, we should encourage development of alternative sources of energy including geothermal, wind, solar, hydroelectric and possibly nuclear.  However, for the foreseeable future we will require petroleum products to power our cars, generate electricity, create plastic products, and ensure factory employment.  It is essential to give the populace honest information, no matter what the biases of the media.

The use of taxpayer money to determine which technologies and companies will be supported is a disruption to the private capital markets.  It has resulted in many failures such as Solyndra and is fraught with opportunity for corruption.   This move toward socialism is an essential difference between the political parties.  It is one thing to support research into technologies at the basic science level, but wholly different to then pick which company to encourage.  The risk of corruption outweighs the potential of any benefit.  The private sector is not perfect, but allows greater opportunity for a profitable technology.  At least the outcome will be a voluntary success and not a coerced one.

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