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10 Reasons Petroleum Prices Will be High

By Richard G. Green - DPA President-Elect

Multiple factors are fueling the price increases for crude oil and ultimately gasoline pump prices. Gasoline prices are dependent on crude oil prices since crude oil is the feedstock for refined gasoline. Consumers have long benefited from the oil industry they love to hate providing abundant gasoline. The cumulative effect of poor economic policy and misguided environmental law is reality of potential gasoline shortages and national security problems. Do not expect gasoline prices to return to former levels.

1. We are at war, and war breeds uncertainty.

Uncertainty fuels speculation and this has affected oil markets. The war is with a religious sect, not a defined geographic entity; the enemy is a radical sect of Islam, and the world's greatest oil reserves underlie generally friendly Muslim countries that could fall prey to these extremists. The war with terrorists and the uncertainty will persist indefinitely, probably for decades.

2. The dollar is declining in relation to other benchmark currencies.

Thus, gasoline is higher priced in the United States than four years ago but nearly the same in Europe due to Euro strength against the dollar.

3. Deliverability of crude oil is at or near capacity worldwide.

Far too few oil wells have been drilled in the last decade to maintain or increase this deliverability. Prices for oil have been relatively low and volatile for 20 years inhibiting capital investment. As a result the large oil deliverability surplus available in the mid-1980's is now gone and gasoline prices rise.

4. No new giant oil fields have been found in 20 years despite extensive world-wide seismic exploration and drilling using state-of-the-art technology.

These giant fields historically have been the supply source for a large portion of oil supplies. Without new giant discoveries oil production decline rates escalate because smaller fields deplete faster.

5. Drilling and operating costs have soared.

The average cost to drill wells in the United States has increased 50 percent in the last five years, and critical items such as steel casing and tubing are now in short supply and expensive. This will cause even higher costs in the future.

6. Crude oil and gasoline are taxed at multiple levels.

Oil is typically taxed at local and state levels. After refining, gasoline is also taxed at the pump by states and also by the federal government. As a result, even ignoring income taxes, the largest cost component of gasoline at the pump is taxes. Typically taxes account for 30 percent of the pump price consumers pay.

7. Domestic refining costs have increased in order to comply with federal, state and, in some regions, local environmental laws.

The largest cost component for gasoline after taxes is refining costs, which average around 20 percent. Almost 50 percent of U. S. – based refineries have been forced to close in the last 15 years mostly due to high-cost environmental mandates. The unintended effect of environmental regulation has been to reduce our national refining capacity to critically low national refining capacity to critically low levels and increased gasoline and crude oil imports. We have damaged our own national security, and no new refineries have been built in decades. We are now vulnerable to refinery destruction or import supply disruptions.

8. Demand outside the United States is dramatically increasing and the U.S. economy is recovering from 9/11.

China has become the second largest importer of crude behind the United States and may eventually overtake it since per capita consumption is still small compared to the United States . Demand in populous India is also increasing rapidly.

The United States has declined in energy consumption as compared to the rest of the world but still consumes 25% of the world's refined products.

9. The oil service sector has been weakened by decades of poor prices.

The total number of drilling rigs worldwide has declined to less than the number of rigs in just the United States in 1985. Virtually all usable rigs are already drilling. Many more rigs will need to be manufactured and this will take considerable capital and time.

10. Economically attractive energy alternatives to gasoline do not exist.

•  Fuel cells are still decades and much higher fuel prices from reality.

•  Ethanol additives to gasoline are politically popular but inefficient since more energy is required to produce a gallon of ethanol than is gained.

•  Natural gas-powered vehicles work, but natural gas is also of uncertain supply.

•  Hybrid gas-electric cars are viable and could slightly reduce domestic demand increases widely accepted. Unfortunately, they are not significant on a global basis and are not proven reliable on a long-term basis. Gasoline prices will drop with increased supply of product or reduce demand. This could happen for a shirt time, particularly in localized markets. Longer term, to increase supply will require years of life time – not months – and large capital investments needed in a climate of political and economic uncertainty. This seems as unlikely as a large global demand decrease. Prices for gasoline will remain high.