Let's start with a Gallup poll that was taken in late 2007 to see what most Americans think about it. First of all I should mention that two-thirds of the respondents said that they are being seriously effected financially by the increases. What surprised me is that this is only two-thirds. And, as you might expect, it's those in the lower income brackets that are affected the most.
According to this poll, Americans gave the following reasons for the increase (the numbers to the right are percentage of people that gave the response)
Oil and gas company greed 34
Problems with refineries/not enough capacity 16
Iraq war 13
Increased demand (not enough conservation) 10
Politics/government 9
No regulations on oil companies 5
Other 13
Are these numbers valid? To get a better handle on the problem let's begin with the major factors that contribute to the cost of a gallon of gas. They are (numbers to the right are approximate percentages of the total):
Getting the crude oil out of the ground 55
Refining the crude 16
Selling (retail) and distributing 9
Taxes (federal and state) 20
Although gas taxes have increased by about 5 percent over the last few years, it's fairly obvious that the last two items in this list have not contributed significantly to the recent price increases.
This takes us to the second item on the list, namely, refining the oil. Problems with refining can, indeed, cause a jump in prices; we merely have to go back to the Katrina disaster to see its effects. Katrina put several refineries on the Gulf Coast out of operation, causing a drop in production, and as a result prices rose. But as the refineries came back on line, prices dropped. To my knowledge, there have been no serious problems with refineries over the past year or so (as the prices have skyrocketed) so it's hard to blame them. It should be noted, however, that few new refineries have been built in the US in the last few years, and this is no doubt part of the problem.
This leaves us with the top item on our list, namely, getting the crude oil out of the ground. And this takes us to oil companies and the countries exporting the oil. Let's begin with the oil companies. Anyone who has been reading the news lately knows that their profits have increased dramatically. Over the last few years, in fact, their profits have nearly doubled each year.
ExxonMobile reported revenues of $405 billion in 2007, with a profit of $41 billion. Chevron reported $214 billion in revenue, with a profit of $19, and Conoco/Phillips reported $187 billion in revenue and $12 billion in profit. These profits are the highest of any company in the U.S.
Oil companies argue that they need high profits so that they can search for more oil, and indeed this is a large expense, but this search has been going on for years, and we have to wonder why a sudden increase in price would be needed to sustain it now. Amazingly, despite their profits, oil companies are still being given tax breaks and grants as an incentive to search for more oil. With all the money they are making, why would they need them? Somehow, it makes more sense to introduce a windfall profit tax on them.
The real problem, however, is not the oil companies. They have some control over the price of gas, but the real control is in the hands of the crude oil suppliers. Before I look at them, however, let's look at some of the other reasons for the spiking prices. I'll list them, then discuss each of them below. They are:
1) The increased demand by developing countries such as China and India.
2) Most of the oil that was easy to get at has been used up. Furthermore, most of the oil presently being pumped is very deep in the earth.
3) In addition, much of the oil we are now pumping is not high quality oil(compared to oil closer to the surface) and it requires more refining.
4) The price of oil is closely tied to the value of the dollar. As the American dollar slides in value, it buys less oil from abroad.
5) Turbulence in the middle east and Venezuela are a problem.
6) Major oil producing and exporting countries such as Mexico, Iran, Russia, and Indonesia are using more and more of their own oil domestically, and are exporting less.
There's no doubt that China, India and other developing countries are using much more oil than they did a few years ago, and it is having an effect. In fact, it's likely to have an increased effect as more and more cars are built around the world. China's demand, for example, increased by about 7 percent in 2006, and even more during 2007, and it will no doubt continue to increase. At the same time, America's demand has remained approximately level, but it, of course, uses much more oil than any other country. With the continuing increase around the world, problems are inevitable. As everyone knows, there is a limited supply of oil left in the ground, and as the demand increases it will be used up at an ever increasing rate. At some point in the future something has to give, and it will. And we'll have to shift away from oil as a major energy source (I'm sure I didn't have to tell you this).
In addition, it is getting more difficult to find oil, and most untapped deposits are very deep in the earth. A bright spot, however, is the huge deposit in the form of tar sand in Alberta, Canada. According to some reports, there is at least as much oil in these tar sands as there is in Saudia Arabia, and possibly as much as all conventional reserves left in the world. A tremendous amount of money is now going into developing the technology to extract it, but there are serious problems with regulations and environmental issues that are delaying things.
Fourth on our list is the problem of the falling value of the American dollar (compared to other world currencies). It has an effect because most of the world's oil sales are made in U.S dollars, and when it weakens, it buys less. Because of this, several OPEC countries are now asking to be paid in Euros rather than American dollars. The falling American dollar, however, may not be as much of a problem as it appears. It is important to separate the nominal and real values of currencies; in other words, their face value and what they can purchase on the world market, and it has turned out that the purchasing power of the American dollar has not decreased as much as it might seem, compared to other currencies.
Fifth on our list is the Iraq war, and the huge debt that has resulted because of it. How much of an effect does it have? According to the Gallup poll quoted earlier, most Americans believe it is the third most important thing that has led to the increase. Let's look at some of the effects of the war. First of all, our huge debt is one of the main things that is responsible for the falling dollar. In addition, it has had an impact in that it has cut off much of Iraq's oil reserves, and it has curtailed it for years. Another problem caused by the war is that terrorists and other factions are continually attacking the oil pipelines, trying to disrupt production, and they have been fairly successful. Closely tied to this is the fact that the war has significantly increased the number of terrorists around the world. Furthermore it has severely tarnished our reputation around the world. Need I say more.
Anyway, let's turn to the major reason for the increase.
Surprisingly, the major reason for the rapid increase is rarely mentioned in the press. Perhaps it's because they have us "over a barrel" and we do not want to make them mad at us. I'm referring to the group of nations that is mainly responsible for setting prices, namely OPEC.
OPEC was created in 1960 by the nations Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Their stated purpose in coming together was to form a cartel that could unify and coordinate policies, and one of their major policies was oil prices. In reality it's goal was to secure and keep oil prices as high as possible.
OPEC now has several other member nations, including Algeria, Angola, Equador, Indonesia, Libya, Nigeria, Qatar, and United Arab Emirates (since the war, Iraq is no longer an active member). Its headquarters is in Vienna. And there's no doubt that it is a powerful cartel. It controls 36 percent of the world's oil production, and controls two-thirds of the world's remaining oil reserves (not including the Alberta tar sands).
OPEC can significantly increase the price of gas by merely curtailing production, and it has done this in the past. In 1967 (shortly after the Arab-Israeli war) several Arab members stopped shipping oil to countries that supported Israel (including the U.S.), and this caused an immediate jump in prices. OPEC can also decrease oil prices by increasing production. At the present time most OPEC countries are close to their optimum production rates. One that isn't, however, is the largest producer: Saudi Arabia. It could increase production, but it knows that this would decrease prices, so it has refused. We don't have much leverage on it, but we do supply it with a large amount of military equipment, and it has been suggested that we should threaten to cut this off if they don't increase production. Is this a good idea? I'll leave that up to you.
Let's turn now to OPEC profits. According to estimates, they earned $675 billion in revenue in 2007, and will bring in about $863 billion in 2008 This is considerably larger than the revenue of U.S. oil companies, and they don't have to do anything to get it. In other words, they have no expenses. Somebody has pointed out that at this rate they are making enough money to buy an American company the size of General Motors every six days. This is obviously a huge flow of American money out of the U.S. to the middle east.
Finally I should mention that a number of experts have pointed out that if OPEC didn't exist, oil prices would be much lower. The various OPEC countries would then have to compete against one another.
Is it greed? I'll let you make up your mind, but I'm sure I know what you'll conclude.
Barry Parker. visit my website at BarryParkerbook.com
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