Blame the oil companies! The evil, profit-driven corporations care nothing about the hefty, pocket-draining price of gas, only about their bottom line!
This seems to be the standard battle cry for many Americans in response to the sky-high crude oil prices of recent as well as the slowly creeping gas prices approaching averages of $3.50 in many places. It is not a secret that the top three private oil firms (BP, ExxonMobile and Royal Dutch Shell) have been breaking and re-breaking record highs in revenues and profits every year for the last 10 years. The incorrect assumptions that people are making is that these record profits are due to oil companies’ control over the market, when in reality it is the opposite. The following are facts and truths that Americans and other oil consumers should know:
Why the price of oil is so high: As noted above, many think oil companies have the ability to manipulate the market and maintain a high price of oil to maximize their revenues. The simple truth of the matter is that it is all about supply and demand. As you may know, many large sectors of the developing world are doing just that, developing, and at a very rapid pace. As China rapidly industrializes, its insatiable taste for oil continues to grow. In the last 10 years China’s oil consumption has doubled, compared to the United States’ consumption increase of 13 percent. Another daunting fact is that the increases in oil consumption in China, India and Indonesia combined over the last two years match the entire amount of oil used by the U.S. in 2007, and leading experts believe that by the year 2020 China and India will both match the U.S. in oil consumption, if not surpass it. When the equivalent amount of oil that the U.S. demands in a given year is matched by other sectors of the market, that represents a significant factor in the rise of oil prices.
The supply side of the market is a similar tale. During the oil crisis of the 1970s, many oil pricing problems came from the fact that much of the oil the U.S. consumed was derived from OPEC sources. This is not the case today. With many suppliers in the market, such as Venezuela, Russia, Mexico, Canada and the North Sea, it is much harder to create a market monopoly. The problem is that many leading experts believe that oil production has already peaked in many countries back in the early part of the decade. This roughly translates to more oil is being consumed than discovered. With a gradually depleting supply and a steadfast exponential increase in demand, it is unlikely the price of oil will see its lows of $10 a barrel from only nine years ago ever again.
Why the price of gasoline is so high: There are more contributing factors to the price of a gallon of gasoline than people realize. The input price of oil accounts for only one-third of the actual price of gasoline. Another third of the price is the cost of refining the oil into gas. With more demand for gasoline every year, more oil needs to be refined, but the U.S. has not built an oil refinery since 1976, limiting the amount of oil able to be refined and pushing up the price of gasoline (this is where the spike in gas prices came from after Hurricane Katrina destroyed refining capacity in New Orleans). Another large contributor in gas prices many do not know about is the gas tax the federal (and sometimes state) government places on gasoline, accounting for almost 60 cents of the price. For a possibility in lowering gas prices, writing to your senator or congressman is more realistic than forming groups on Facebook in which the members unite against purchasing gas on a certain day or from certain companies.
High oil prices are all bad?: The high price of oil and gasoline may be a burden on your wallet, but it can have good effects in the long run. With higher input costs for everyone, there is a general outcry for new sources of energy, more efficient sources of energy, energy that the U.S. doesn’t have to be dependent on others for. This is where the first boom of “clean” energy came from back in the ’70s and ’80s, giving us substantial increases to solar, wind, geothermal and nuclear energy. This spike in energy prices hurts now, but it lights the fire, so to speak, under researchers to refine our energy plans for the future, bringing them sooner rather than later. In addition, the public transportation system will get a huge boost and will eventually be comparable to the ideal systems of Europe, which has experienced high gas prices far longer than Americans.
Everyone wants to blame someone for the high energy prices of recent, but the fact of the matter is no one is to blame, and the prices will not be alleviated any time soon. Suggestions for this summer are invest in a bike, ride the bus and develop an efficient hydrogen fuel cell. These are the only things that could cause energy prices to decrease this summer.
John Coleman is a junior economics major. He can be reached for comment at [email protected].
