Why ARE Gas Prices “High”?

[DISCLAIMER: I work on the service side to the energy exploration sector.]

The simple answer OUGHT to be supply and demand. And, that’s predominantly true.

Take a look at the following graphs and you’ll see the broad brush stroke that is “pricing” of gasoline (in the U.S.)… Source

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Now, the RAW cost of the crude oil has gone UP while almost everything else is pressured down right? NO! look at the price deltas $1.85 up to 2.27, years 2004 to 2005. That doesn’t factor 2006 and 2007 which are higher still.

So, crude costs were $.87 per gallon in 2004 vs. $1.20 in 2005. Quick math says crude exporters bagged a 72.5% raise. Don’t be so quick to bad mouth the Exxon’s and Shell’s of the world. Hydrocarbons (oil and natural gas) are getting HARDER to find. NOT EASIER. It’s expensive as hell to find new fields. The technology is pushing us farther out and into deeper water/extremes to satisfy the energy requirements of the world (expected to grow by 50% by 2020).

How did taxes fare? $.43 per gallon (2004) vs. $43 per gallon (2005). A push.

This surprises the heck out of me. But, is telling… Refining claimed $.33 per gallon (2004) vs. $.43 per gallon (2005). A 30% raise. You might not know a thing about refining capacity in the U.S. But, there hasn’t been a new refinery built in the U.S. in umpteen years. Even though our consumption has skyrocketed the 149 operating refineries in the U.S. have shouldered the demand. BTW, that number is down from 216 refineries in 1986! How are they doing it? Expansion of existing facilities and efficiencies.

Finally, distributing and marketing (gasoline trucks and gas stations). $.22 per gallon (2004) vs. $.20 (2005). WHAT!?!?!? WTF!?!?!? The people we’re beating over the head and grousing about the most are the ONLY outfits to take a bath on the price of oil.

I hope this helps some of you better appreciate a few of the supply side facts of our addiction to oil. It’s not cheap and it IS going to get more expensive in the U.S. If you’ve had the good fortune to travel abroad… we have it GOOD in the continental U.S. Go to Europe or South America or Africa.

It doesn’t help that we’re a net importer of oil (a strategic element of our growth engine economy).

Two fantastic books worth reading to better understand our pickle and how some “oil smart” economists figure we can navigate the impending shortages (non-affiliate links):

Thousand Barrels A Second,” by Peter Tertzakian. I spent a couple hours with Mr. Tertzakian. He’s smart as hell and very deliberately tells a tale of how we’ve navigated various energy sources and their depletion over time (tallow, whale oil, kerosene, etc). What’s ahead is still largely an unknown. Nuclear? Maybe. Still an option. Takes about 10 years to build a modern facility and bring it online. Did you know France is 70% powered by nuclear plants!? True! Renewables? Not with current technologies. Doesn’t scale adequately. Petrochemicals remain the highest density, best value for the money source of energy on planet earth given our current scientific knowledge. H3 sounds like an interesting source. But, it’s closest plentiful source is the surface soil of the moon. (Which China is about to set up shop on).

Energy Futures,” by Ralf Boscheck. This book came across my desk just this week for review. I’m only 15 pages in and I can tell you this darned thing is jam packed with so much geopolitical insight I’m not going to read another book of any kind until I finish this dude. It underscores why the major oil companies, the national oil companies and the independents do what they do (and how and when).

Folks, I’ve been forthright… I’m in the oil industry in a sense. I’m not an industry apologist. I’m WAY, WAY, WAY down the foodchain. I’m ALL FOR developing alternate resources! One of these days 20, 50 or 100 years out… we’re not going to have the amount of oil needed to power the economic engines of the world. The gap of known recoverable reserves is not growing at a clip that can keep pace with the forecasted appetite. Two things could happen:

We could become more efficient in our global energy consumption. Technology could help us here. Gas powered engines are TERRIBLY inefficient!;

We could become more efficient in our global energy production. Again, technology could help us reclaim more efficiently the resources we’ve already discovered (or can discover).

The alternatives are shortages or alt fuels. Only time will tell.

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