Gasoline and diesel, like other crude oil products, are subject to the ups and downs of the international oil market. When addressing the sudden surge in fuel costs in America, our politicians tend to focus on OPEC, which is only partially the reason behind these price increases. Middle Eastern suppliers are major players in the United States oil market, but we tend to buy oil more consistently from countries in our neighborhood. Although OPEC controls the lion’s share of the world’s crude reserves, the number one supplier of crude oil to the United States is Canada, which accounts for about 10% of our yearly consumption. It is supplied on favorable terms under the NAFTA Agreement, which makes one ponder the logic of revising the wording of that treaty, at least in regard to oil imports. Major suppliers to the United States also include Mexico, Venezuela and Nigeria, the latter two being OPEC members.
For those who remember the oil shocks more than thirty years ago, OPEC was in its infancy, and we may have looked begrudgingly down our noses at a group we considered a conglomeration of Nomadic Tribes. However, OPEC has evolved into a sophisticated organization whose pricing policies may be stated by Ministers, but whose actuaries are highly educated MBAs and PhDs primarily from western universities. OPEC does not control the international oil market, but it controls a sufficient share to influence the supply and, in turn, prices. If OPEC is pumping 20 million barrels a day and receiving over $130/barrel, there is no reason to increase its production and have the price fall precipitously. OPEC is pumping less oil but receiving more gross revenue. This is free market enterprise, an economic policy strongly supported by the United States.
The explosion of crude oil consumption and subsequent sharp price increases have caught most people by surprise. The burgeoning economies in China, India and Brazil, all of whom are oil importers, have experienced unprecedented expansion. Russia’s economy is also booming, but Russia is an oil exporter and currently rivals Saudi Arabia for the top spot in barrels/day exported.
In the Western economies, very little oil is used for power plant generation. In the United States only about 2% of generated power comes from oil. The main culprits are automobile and truck consumption followed by heating oil and jet fuel. The new mileage standards imposed by recent Congressional legislation will help, but the original mileage standards established a generation ago excluded light trucks and SUVs, gas guzzlers that will continue to dominate our roadways for many years to come.
If it is bad now it should get worse: To pardon a pun, the fuel has yet to be added to the fire. Crude oil is the most internationalized commodity, and consumption throughout the world will continually have a direct bearing on our price at the pump. Brazil, China and Russia are adding about one million cars each to their roads every year. By various means, other developing economies are promoting an automobile for every driveway. In China and a number of other emerging economies, gasoline is subsidized by the government to keep it affordable and to promote automobile purchases. India, China and a number of Asian countries are constructing car factories that will produce vehicles with a price point between $2500 and $7000. This will make automobiles even more accessible to many more people and obviously further strain the already finite supply of oil. American automobile companies are parties to these projects, and if their sales are plummeting in America, their foreign operations will certainly compensate for their faltering domestic production. Our domestic price of gasoline directly reflects the growing worldwide demand for crude oil, which will only exacerbate the stress on supplies in the future. More cars on the road in every country will translate to higher prices at our local service stations.
Statistically, the amount of oil consumed in the United States has not increased dramatically during the last three decades. Due to our own shrinking domestic supply and the inability to tap new fields, we have had little choice but to supplement our needs through foreign sources. This puts us in the world market as competitors with every other country that has to rely either fully or in part upon imports. If the United States were totally sufficient for her oil needs, there may be pressure taken off of the international market. This would not necessarily guarantee a price reduction for gasoline as we live in a free market system and the value would still be determined in the global marketplace.
Crude oil is fungible and an increase in production in one area will not necessarily have a large impact on the worldwide supply/demand curve, especially with demand on a course of constantly exceeding supply. There has not been a new oil refinery built in the United States within the last three decades, and as a nation we import not only crude oil, but also gasoline, diesel and jet fuel. Regrettably, the shiploads of refined products are often from countries and areas that have proven to be unreliable long-term allies, thus making our future supplies uncertain and subject to geopolitical events.
If the United States continues with the current national energy policy we will remain hostage to the vagaries of the international oil market or will allow our energy situation to become increasingly precarious. In that case, we will always be reactive instead of proactive in dealing with our energy needs in the face of costly supplies. Under the circumstances, there is only one way to travel for the near future and that is through conservation inspired by intelligent leadership or conservation that happens naturally once gasoline hits $5.00/gallon.
