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Here We Go Again – It’s a Bird, It’s a Plane, No it’s Oil Prices!

March 2, 2011

Headlines across the country read: Gasoline retail prices reached a 2-year high – Regular grade at-the-pump gasoline top $3 a gallon in all regions of America – Los Angeles hits $4 – Oil and gas supplies grow even as demand for gasoline is weak – $5 gasoline predicted by Memorial Day!

EIA’s February 21, 2011 petroleum analysis shows regular grade retail gasoline prices in the U.S. increase $0.05 from previous week to a national average of $3.19 per gallon. The Gulf Coast reported the lowest at-the-pump prices around $3.03 per gallon, while the West Coast showed the highest at $3.48. Hawaii and California lead the states with prices at $3.97 and $3.55, respectively. 

So why is it surprising that gasoline prices are surging again? We have been there before – many times – since the early 70s. We also know that prices will soon drop again to tolerable levels. Talk of potential shortages due to the unrest in the Mideast is a tale told by an idiot full of sound and fury signifying nothing. Price fluctuations are a natural market phenomenon that will readjust in due course. Why then be concerned?

The question is will complacency ultimately rule again? Sure we will take measures to curtail use of our beloved car. Maybe even lower our thermostats for the rest of the winter.  The answer is probably “Yes.” 

So if the price of petroleum falls to reasonable levels, then why spend more for something that may have little near-term payback?

In all fairness, there has been increasing awareness of the need to reduce our appetite for fossil fuels and cut our dependence on foreign oil. This awareness is translated into real practices that in mass will have a major effect on our reliance of petroleum.

The value of having stable oil markets with price points reflective of the true cost of petroleum is simply the ability to develop a cohesive long-term energy policy that stays the course. Stability brings planning and execution. When prices are low, it is political suicide to mandate use of renewable energy and adoption of energy efficient practices in the home and workplace. All are necessary for the U.S. to transition from an oil based economy in order to achieve energy security, economic viability and a cleaner environment. Both the public and private sectors are confronted with business cases that without federal and state incentives are difficult to make financial sense. When prices are high, there is a temporary mass scramble to do whatever is necessary to reduce our reliance on oil.

The current rise in petroleum prices is purportedly due to market projections of potential shortages arising from the civil unrest in the Mideast. This projection presents a dilemma on two accounts.

The first being an atypical market swing toward higher retail prices concurrent with a softening in demand and relatively high supply levels in the U.S. No question, this fluctuation is an obvious reaction toward the unrest in the Mideast, which can impact the flow of oil to the U.S. Confronted with the prospects of higher demand in the upcoming summer months due to higher electrical usage and increased travel, the fear and price increases seem to be a logical reaction. However, in the U.S.  petroleum accounts for only 1% of all the fuel sources used for electrical generation. As reported by the EIA, coal (48%), natural gas (18%) and nuclear (22%) are the primary fuels for electrical power in the U.S. This leaves transportation and industrial as the key demand sectors for petroleum at 72% and 22% respectively.

Nevertheless, as more Americans adopt stringent energy efficiency practices (sustainability), replace older fuel-burning cars with new more fuel-efficient means of transportation, purchase electric vehicles and convert their existing cars to natural gas, demand for petroleum should steadily decrease over time. If effective in reducing our reliance on petroleum, this should offset any supply perturbations. Isn’t this what the Department of Energy (DoE) has been funding and planning for with countless billions of dollars since its creation in 1974? On page 1 of the DoE’s FY11 Congressional Budget request, the third line states “Since 2001, the administration has committed $183 billion through the DoE to help drive America’s economic growth, provide for our national security and address the energy challenges that face our nation.” Something seems to be amiss.

The second dilemma stems from the so called impact of reduced supplies from the Mideast. The following chart, derived from EIA’s November 2010 data, looks at those countries that make up more that 4% of the U.S.’s oil imports. Of the potential 123 oil-importing countries in the global economy, only eight (6.5%) fell into this category of supplying more than 4% of America’s oil needs. Combined, these eight countries deliver 76% of U.S.’s oil imports. Of these eight countries, only Saudi Arabia is a Mideastern country. At 10.3%, Saudi Arabia is important to our oil economy, but by no means the major supplier, which falls to Canada and Mexico. Maybe this oversimplifies oil production and trading, but one would think, if possible, that shortages could be made up by any or all of the other seven major importers to the U.S. On a straight-line basis, each country would only have to increase imports by about 1.5%.


Finally, there may be a third conundrum needing reconciliation. This has to do with the premise that the war in Afghanistan and Iraq was meant to secure our oil supply lines and also resolve our ideological and terrorist concerns. If so, then what happened to our $1,156,050,845,731 (over $1.1 trillion) spent by the military in that region since 2001? If we spent such huge sums of money to accomplish these goals, why then should these regional disturbances in the Mideast destabilize the oil markets to the point that prices are climbing faster than Superman can fly? The point is that you just don’t get what you pay for. In this respect, dollars spent don’t equate to oil flow. Terrorism appears to be detained at a cost of an apparent increased dislike of America and a bleeding budget deficit. By the time this is published, that $1.1 trillion dollar number will have grown. The current number and flow of dollars for the war can be located at “The Cost of the War Clock” at http://costofwar.com/en.

By allowing the price of oil reflect its true cost, renewable energy and energy efficient practices can finally compete on a level playing field. Under this scenario more taxes can flow back to the government and less has to be expensed for incentives. Taxes constitute about 13% to 14% of the retail price of gasoline. The important point that must be understood is that the price of oil is held lower than it true cost.  Contributing factors excluded from oil’s cost include:
• subsidies, which result in oil production being among the most heavily subsidized businesses in the U.S.
• the costs to protect our overseas oil supply lines by the Department of Defense
• the tendency of “the power of oil” to adversely alter the economies and politics of the petroleum producing countries, some of them petro-oligarchs with regimes, which may conflict with U.S. interests
• short- and long-term impact on the environment
• contribution to the trade deficit
• added health-care costs due to environmental pollution.

Additionally, our government is confronted with what would be a win-win long-term strategy with a lose-lose short-term backlash. Federal and state incentives promoting renewable and sustainable energy programs are difficult to justify and pass in times of extreme budget deficits. Why would any public official provide legislation to eliminate the oil industry’s incentives? An even more unpopular move would be taxing the heck out of oil to act as a buffer to maintain a reasonable high level that better reflect petroleum’s true cost much like our European partners do. Why not develop a short- and long-term energy policy that stays the course. This way our elected officials don’t have to stick their necks out and bear a backlash at the polling booth when petroleum prices drop again like some modern day Machiavellian trick. Simply a matter of leadership, vision, trust and courage

To obtain an honest picture of the retail gasoline price fluctuations from 1970 to 2010, the following chart shows the yearly percent change (%) in average retail petroleum price when compared to year 1970, adjusted to 2010 dollars by the Consumer Price Index (CPI).  Data from the EIA and a CPI calculator that takes a dollar value for any given year and coverts it to another value representative of any other year the user cares inputs. (The calculator can be found at http://www.bls.gov/data/inflation_calculator.htm.)  

You can see the chart the oil crisis of 1973, which other than the huge lines and fear of running out of petroleum by the 1990s, is paltry in comparison to today’s prices. Also, the alarming spike in the early 1980s, which should have been a call to action if not a war against fossil fuels, was followed by a 20-year period of relatively low prices and complacency by the public and private sectors.

So here we are again. The third oil crisis of 2008 dissipated as quickly as it flared up – only to be followed quickly by this year’s dramatic spike back up again.

If we could make The Bomb in a few years, don’t you think we can do something now, four decades after the Arab oil embargo?

Here’s what we can do.

Another recommendation would be to shutter most, if not all, federal agencies purportedly devoted to energy. On a performance basis, this action would be justifiable. Treat “oil” like the enemy. But don’t let the government fight the war; let an open marketplace do that. Unused federal dollars earmarked for energy programs should be returned to taxpayers. The added dollars would help stimulate demand for renewable and sustainable solutions. Concurrently, the U.S. must exert real pressure to eliminate unfair foreign trade practices. American businesses would stand a chance to be globally competitive.

There are some rays of hope ahead. The economy shows some signs of reducing our appetite for fossil fuels, and becoming more energy efficient. Moves towards proper cost accounting and stabilizing the oil markets are under way. Stability brings collective planning for a cohesive, long-term energy policy that stays the course. Visionaries with courage do exist in America.

As Dr. Strangelove said: “It would not be difficult, Mein Führer. Nuclear reactors could – heh, I’m sorry, Mr. President – nuclear reactors could provide power almost indefinitely.”  Add to this the modernists’ view: so could wind, solar, moving water and heat from the earth!

And that’s the way it is, today March 4, 2011!

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