THE PRICE OF OIL
REGULATED BY SUPPLY AND DEMAND
August 3, 2008
Three in four likely voters – 74 percent – support offshore drilling for oil in U.S. coastal waters and more than half (59 percent) also favor drilling for oil in the Alaska National Wildlife Refuge, a new Zogby International poll reveals. The vast majority of voters want to see action and they want to see it now.
Gas is over $4 a gallon. Oil is over $146 a barrel and rising. We import two-thirds of our oil, sending hundreds of billions of dollars to Russia, Venezuela, and Saudi Arabia. And yet, we voluntarily prohibit ourselves from even exploring huge domestic reserves of petroleum and natural gas.
U.S. crude oil production has fallen 40 percent in the last 25 years; 75 billion barrels of oil have been declared off-limits according to the U.S. Energy Information Administration. And that right there would be enough to replace every barrel of non-North American imports for 22 years. Think of it, that is a quarter-century of energy independence. And politics has stood in the way of progress. GOP candidate John McCain has called for building more nuclear power plants and ending a moratorium on drilling in 85 percent of the country's coastal waters. Democrat Barack Obama has emphasized incentives for conservation and development of alternative energy sources and opposes expanded offshore drilling.
The high price of gasoline and oil can be attributed to only one factor. The market is at work. Markets allocate resources to the highest bidder, and oil and gas prices are not unique from those laws of supply and demand. The explanation of high energy costs are simple, too little supply for the demand.
In the present situation supply has been reduced by OPEC's reluctance to increase demand as a response to a declining dollar. For OPEC to attain its desired exchange of dollars for oil it must charge more. This has resulted in a limited overall supply at a time with strong and growing demand. On the demand side of the equation lays the largest culprit of high energy costs. The robust recovery in the United States has created a surge in demand on its own. This surge of demand has happened along with massive increases in oil and gas demand in the rapidly industrializing economies of China and India which is responsible for creating substantial increases in base demand not seen in years. This stress on the demand for oil has created the prices we pay at the pump, and any solution to these high prices must be remedied through the forces of supply and demand.
The reduced supply also has a domestic flavor of poor planning and insufficient capacity to meet the forces of demand. However, these inabilities to meet market demand have been imposed by agencies of government, and the solution to these problems lie within government. The supply to the US market is substantial and supply is restricted by an inadequate refining capacity. It was reported by the Wall Street Journal that a new refinery has not been built since 1976, and there are no plans to construct new facilities. Furthermore, it was reported that in 1982 there were 301 domestic refineries, and today, in 2008, there are a mere 153. Furthermore, refining capacity is less than demand. We domestically refine 8.2 million barrels a day and consume over 9 million barrels daily.
In 2008, there are half the number of operating refineries in the US as there were 20 years ago... mostly due to the retirement of outdated facilities that could not be economically reengineered to meet increasingly strict environmental regulations.
We must see immediately greater exploration, more drilling, and the building of more refineries... liberal politics not withstanding. To remedy the high prices, policymakers must take steps to either enhance the refining capacity of each existing facility or build more. Environmental regulations, complex and inconsistent regulations for blend and mixture ratios, along with limited domestic supply of crude oil all contribute to the inability to supply at market demand. A simple solution would be to standardize most blend and mixture ratios in fuel to ensure universal compliance and a greater ease of supply at all levels of the supply chain. The solution of any problem which involves markets can only be solved by alterations in supply and demand. Any solution that does not increase supply or reduce demand will not solve the problem.
Finally, the Strategic Petroleum Reserve was created to insure that oil would continue to flow despite any "catastrophic" disruption of world oil supply. The reserve has acted to enhance the security of America to be certain that even in the case of a major attack or even a radical reduction of oil availability the military and policing agencies of the United States would have those resources available to continue doing their business to protect the homeland. This strategic supply of resources has added to the security of America by allowing for continued policing and military maneuvers in potential times of trouble. That is what the reserve was created for and now more than ever should remain as. There has been an attempt by some US Senators to release the Strategic Petroleum Reserve; that is as much an insult to American Security as it is to American intelligence. President Bush has ordered the SPR to be filled to the brim of 700 million barrels. This has come at an appropriate time to ensure American sovereignty at a time of turmoil in the Middle East.
Energy independence must be a top priority. In short, it is imperative that we see greater exploration, more drilling, and the building of more refineries in the immediate... self-serving, power grabbing extremist left not withstanding. The American public wants actions of change not vacuous platitudes of change. That is how we see it FROM OUR PERSPECTIVE.