Seven Dark Truths About High Gas Prices

Over the past few weeks, politicians have made much hay over high gas prices. Republicans blamed Obama. Obama fired back. And much misinformation flew back and forth. The sad truth is that there are a number of hard realities keeping prices high and the only viable solution is weaning ourselves off of oil over time.

Truth #1 Conventional Crude Oil Peaked in 2004                                                                              

In 2004, production of the stuff we all think of as oil peaked. It topped off at around 70 million barrels per day. And since that time, no matter how much prices increased, conventional crude oil would not significantly exceed 70 million barrels per day. It is a sad fact that the world has struggled to increase crude oil production and failed. $100 oil is proof enough of that.

Truth #2 Increases in Production Have Come From Fuels That Aren’t Oil                                                   

There are many fuels called oil that really aren’t. They include: condensate, natural gas liquids, tar sands oil, oil shale, and bio-fuels. Condensate is a product of gases turned to liquids during the refining process. Natural gas liquids are condensed from wet gasses. Tar sands and oil shales are low energy fuels that have been enriched through a process called hydrogenation. And bio-fuels are liquid fuels interchangeable with oil but produced from crops.

The total production of all these fuels is now more than 18 million barrels per day. All are less energy dense than traditional oil. Most of them cost more to produce. In short, these fuels are simply less economical. This lack of economy makes them more costly, harder to access, and less useful. For example, tar sands cost between 50-60 dollars per barrel to produce. And this increased cost pushes up the overall cost of oil by setting a bottom on prices equal to the cost of the most expensive fuel produced. The reason these new fuels put a bottom on prices is that this marginal oil won’t be produced for very long if prices fall below the cost of production.

Of these 18 million barrels of non-oil, 2.5 million barrels come from tar sands and 2 million barrels come from bio-fuels that require oil to remain in a price range of 50 dollars per barrel or more. These high costs, in turn, push up the price of oil.

Truth #3 Depletion is Increasing the Cost of Crude Production       

Returning to conventional crude, it’s important to note that the cost of production is rising for it as well. The reason is that most of the new crude comes from special wells that require enhanced oil extraction techniques. One example of enhanced extraction is oil fracking. Fracking breaks rock in order to liberate both oil and gas. And the fracturing techniques require more expensive machinery, chemicals and water which increases the cost of production. With oil fracturing, the price of oil needs to also stay above about 50 dollars per barrel. New oil derived from fracking represents about 1.5 million barrels per day. So this flow of oil is also putting a bottom on prices.

Truth #4 World Oil Exports are Declining 

As oil exporting countries make economic gains by selling their costly product, economic activity along with oil consumption in-country increases. This results in net losses in the amount of oil available for export. Among top oil exporters Venezuela, Saudi Arabia, Egypt, Mexico, and Norway, exports are going down. Other countries who were once exporters, including the UK and Indonesia, have now turned into net oil importers. Reduced flows of exports means less oil is sloshing around in a world full of buyers. So demand, long-term, is increasing while supply, long-term, is going down.

Truth #5 Speculators Matter                                                                                                             

Recent estimates from economists indicate that speculators have pushed up oil prices enough to increase the cost of gasoline by 50 cents per gallon. Speculators trade in paper barrels of oil and manipulate floating stocks to increase costs and profit at the margin. That said, unless oil markets were tight, speculators wouldn’t have this ‘opportunity.’ Oil scarcity and fear keep the speculators preying on high prices by making the cost of oil and, therefore, gas even higher.

Truth #6 Current High Prices are Supported By Fear                                                                                      

Recent fears that Iran will mine the Persian Gulf and use military force in an attempt to close the Straights of Hormuz have helped to keep oil prices above $105 per barrel in the US. Currently, fear is probably pushing the price of oil up by about ten or fifteen dollars per barrel. Likely, without such a geopolitical constraint on oil, prices would fall to the low 90s as 100+ dollar per barrel oil has caused demand destruction in various markets worldwide over the past year.

Truth #7: 80 million New Cars are Produced Each Year                                                                                    

There are more than one billion automobiles in this world. And each year one is produced for every person born. These vehicles require energy to operate and the vast majority of them require oil. This reality places a very high demand on depleting oil. The only way to curtail this demand and still rely on oil is to, at times of scarcity and high price, reduce the amount of driving. The result in this reduction is a curtailment in economic activity resulting in slower growth or recession. So you have tightening, more difficult to access supply pushing directly against rapidly increasing demand in the form of a broad swath of new vehicles and machines produced each year.

Prognosis: Without Alternatives, Increased Efficiency Oil Prices Will Keep Rising Long Term                        

The combined realities of a plateau in conventional crude oil, the increased cost of producing new oil, rapid depletion in existing oil fields, and the contentious geopolitics of oil mean that over the long-term oil prices will continue to rise or remain high. The only way out of this depletion price trap is to drastically increase efficiency and to shift vehicle, machine, and industrial systems to fuels that are not depleting, preferably alternative fuels and renewable energy. These changes require long-term efforts and large investments. The alternative pushed by political forces aligned with the oil industry — relying only on increased drilling — is a short-term fix that will only more rapidly deplete the remaining, meager and difficult to access stores of oil.

 

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