Bob Inglis

Growing demand, limited supply. These four words describe the central factors in the rise in gas prices. However, America’s history of innovation gives us hope that we can develop new technologies to change the playing field, making supply and demand of crude oil only part of the story.

Until we do, we will continue to have a national security problem as we rely on unstable and often hostile oil-producing countries.

Recent price increases, totaling as much as 60-cents-a-gallon in a matter of weeks, are a result of three basic factors that came together in 2005:

• Demand: China and India and other emerging economies are booming with growth rates greater than 10 percent. As they grow their appetite for oil grows. China is now the No. 2 demander of oil in the world.
• Supply: Hurricane Katrina and Rita effectively shutdown 10 to 12 percent of domestic supply.
• International Instability: Terrorism and instability in foreign oil-producing nations have increased the uncertainty of supply and that uncertainty has caused prices to rise.

Increasing demand and reduced supply have left little excess capacity or cushion to absorb shocks in supply. Throughout 2005 the world typically had 1 million barrels a day excess capacity on 84 million barrels a day of demand. As a result, the mere threat of a minor disruption caused price spikes.

Is big oil price gouging? Are retailers taking advantage of consumers? These questions have been raised in the light of the increased prices and reports of oil company profits and investigations have been authorized by the President and Congress.

When will prices come down? While small reductions are likely, the trend is up. We are entering an era in which oil producing countries have many new and large customers.

We need a new strategy. The U.S. Energy Information Agency (EIA) projects that global demand will increase as much as 2 percent a year and producers will struggle to keep pace, despite billions of investment in increasing capacity. Exxon Mobil’s 2005 energy outlook says that worldwide energy demand will increase by 60% over the next 25 years, necessitating a 40% increase in OPEC oil production. Even if they’ve got it, who would want to be that much more dependent on OPEC?

To achieve energy security, we must signal a move now toward fuels of the future like hydrogen. We can be on the road to hydrogen in 10 years. In the meantime, ethanol and conservation can help us reduce oil consumption and improve our energy security.

Frequently Asked Questions: Why are Gas prices so high?

Q. How has global demand affected prices?

• In 2005, the United States’ economy grew by 5%, compared with India at 8%, and China at 10%. With that kind of growth, oil becomes a precious global commodity, and supply becomes tighter.
• The rapid growth of China caught many companies by surprise. Global oil demand in 2004 jumped 3.3 percent. Worldwide energy demand is expected to increase by 60% over the next 25 years.
• China ’s oil consumption has gone from 4.8 million barrels of oil a day in 2000 to 7.2 million barrels a day in 2005, according to the U. S. Energy Information Agency.
• China also has gone on a buying spree, bidding up prices for future oil supplies as it tries to secure future energy sources.
• The increase in global demand and other factors have caused the price of a barrel of oil to go from $42 per barrel in January 2005, to above $75 in July 2006.
• Exxon Mobil recently projected global energy demand will increase by 60 percent over the next 25 years, necessitating a 40 percent increase in OPEC oil production.
• Even if OPEC countries have sufficient reserves – and there are reasons to question whether they do – do we want to be that more dependent on the region that hates the United States?
• Clearly our energy security calls for the United States to have alternatives to rely on as oil becomes increasingly more expensive.

Q. How have ethanol and blended fuel requirements affected prices?

• Alternative fuels such as E85 (85% corn-based ethanol) have not been sufficiently implemented in the U.S., and ethanol supply lags behind demand.
• According to the U.S. Energy Information Agency, last spring the changeover of tanks at terminals, the need for a more expensive gasoline blends to combine with ethanol, and logistical problems delivering ethanol to some areas all contributed to higher prices.
• In order to bring energy costs down, we need to continue to invest in ethanol infrastructure from a variety of sources and in energy alternatives that relieve the demand pressure on fossil fuels.

Q. How has abnormal weather affected supplies?

The 2005 Hurricane season, particularly Hurricanes Katrina and Rita, had the largest debilitating impact on supply:

From the Energy Information Agency (EIA):

• Hurricanes have had significant impacts on midstream and downstream infrastructure.
• Four hundred fifty-seven underwater pipelines were damaged, and the Louisiana Offshore Oil Port had to temporarily stop accepting shipments during both hurricanes.
• Onshore refineries and natural gas processing facilities suffered heavy damage.
• After Katrina hit Louisiana, nearly 2 million barrels per day of refinery capacity were shut down, due to either direct damage or interruption of power supplies. 
• EIA estimates that at the height of the refinery outages nearly 29 percent of U.S. refining capacity and over 60 percent of refining capacity in the Gulf Coast region were shut down. 
• Even as late as October 10, 2005, more than 2 million barrels per day of refining capacity were still shut down.
• Since Katrina and Rita struck 9 months ago, over 30 percent of crude oil and 21 percent of natural gas production from Federal offshore fields was lost by June 1, 2006. (Minerals Management Service).
• Vulnerable domestic oil and refining supplies concentrated in the Gulf continues to be a problem. As of early June, about 15% of oil production in the Gulf was still shut down.
• We need to be impatient and insistent about conserving energy (for example, requiring higher fuel efficiency in cars) and developing alternative energy sources like ethanol, bio-diesel, and hydrogen.

Q. Why don’t oil companies build more refineries in less risky areas?

• There are several challenges with building new refineries:
• Few communities welcome them because of environmental concerns.
• They are expensive, 30-40 year investments that use an input (crude oil) for which the U.S. only possesses 3% of global reserves.
• Oil companies have been able to get more capacity by expanding newer facilities while closing older facilities, and have therefore avoided having to build brand new plants.
• However, the House of Representatives passed the Gasoline for America’s Security (GAS) Act (H.R. 3893) on October 7, 2005, with a vote of 212-210 (212 Republicans voting in favor and 13 Republicans, 196 Democrats, and 1 Independent voting against). The bill remains pending in the Senate. The GAS Act would:
• Direct the President to select three sites on abandoned military bases away from hurricane prone areas to be available to construct new refineries.
• Streamlines the environmental review process for a coordinated approach between federal and state government.
• Give the Federal Trade Commission the authority to define price gouging and fine gas stations $11,000 per person per day for violations after a natural disaster, such as a hurricane.

Q. What part has political instability and tension played in oil prices?

• Iran , the world’s second largest oil producer, and Venezuela, the fourth largest exporter to the United States, have threatened to withdraw oil supplies from global markets because of disputes with the United States.
• Iran ’s President Mahmood Ahmadinejad has said: “Rich nations should be paying $100 / barrel…”
• Hugo Chavez , President of Venezuela, has said he intends to use “geopolitical power from oil.”
• Nigeria , the fifth largest foreign supplier of oil to the U.S., suffers from internal conflict and political corruption that can sever the supply of oil at any time.
• Iraq faces difficulties rebuilding their oil infrastructure and preventing attacks from terrorists on refineries and fuel lines.
• Energy security is a pressing need, and we can find that security in energy alternatives that can be developed and produced on American soil, safe from global political threats.

Q. How about the free market – as prices go up, won’t more supplies come on line?

• To a degree that is true. In the United States, oil production is expected to increase 3 percent, but that is not sufficient when we import 58 percent of our oil.
• The cost of finding new reserves has soared from $4.94 a barrel in 2000 to $8.61 in 2005 for everything from rigs to steel pipe. For each dollar of price above $25 a barrel, Russia now takes 89 cents in taxes, up from 68 cents per dollar per barrel in 2003.
• Every barrel of new oil will cost more to produce and refine. Most of the easy-to-pump and refine oil has already been developed.
• OPEC pumps about 40 percent of the global oil supply. It is not a free-market entity but a cartel of nations that sets supply quotas to achieve target production (and prices). It’s not in OPEC’s interest to increase capacity so that prices come down.
• About 78 percent of the world’s energy supplies are owned by national governments. That means they have a variety of strategic national interests that may determine how they produce or sell oil.
• Today, major publicly-owned international oil companies have far less control over supplies, capacity and development opportunities than before.

Q. Does market trading play a part?

• The volatility of gas prices is partially due to market speculation. As the cushion between supply and demand continues to narrow, investors have the ability to drive up the cost of fuel at the pump. For example, the price of a barrel of oil increased 7 percent in a day because of speculation on gasoline supplies for the Independence Day holiday.
• Much like bread and milk disappear at the first sign of a winter storm, so do global commodities fluctuate according to future speculation.
• Without alternatives, consumers will be unable to find stable footing as prices continue to shift.
• This unpredictability provides just another reason for the United States to invest in more reliable and stable fuel alternatives.

Q. Will gas prices go back down?

• If there is a decrease, it will be minimal. The Energy Information Administration estimates that the average cost of gasoline this summer will be about $2.71/gallon.
• The monthly average oil price is projected to be $68 per barrel in both 2006 and 2007. Retail, regular gasoline prices are projected to average about $2.60 per gallon in 2006 and $2.56 per gallon in 2007.
• Gas prices could still fluctuate and increase. Disruptions caused by hurricanes, attacks on infrastructure or international tension will result in spikes in cost.
• Any decreases will be short-term, and shouldn’t be counted on for long-range solutions to the energy crisis.

Q. Are oil companies price gouging?

• Following the abrupt rise in gas prices, both Congress and President Bush petitioned the Federal Trade Commission (FTC) to investigate possible instances of price manipulation.
• In May 2006, the FTC reported that it had found no evidence of gasoline price gouging in the wake of last year’s hurricanes.

Q. What about drilling in the Arctic National Wildlife Refuge?

• Drilling in the ANWR is estimated to yield about 1 million barrels of oil a day 10 years from now. Ten years from now our national oil addiction will have reached 27 million barrels a day.
• Punching more holes is not the answer. We need to be improving efficiency and moving to alternatives.

Q. What can the government do to answer the energy problem?

• Encourage the production and implementation of alternative fuels, such as ethanol and bio-diesel.
• Continue tax incentives on flex-fuel and hybrid cars.
• Increase vehicle efficiency by restructuring the Corporate Average Fuel Economy (CAFE) program.
• Fund research and development of fuels of the future such as cellulosic ethanol, biomass, and hydrogen.
• Follow the President’s Hydrogen Fuel Initiative with an Apollo-style commitment to be on the road to the hydrogen within 10 years