This week's column is an attempt on the Doctor's part to explain the complex subject of oil supply and consumption, particularly here in the US. The question below is typical of the scores of similar inquiries on the subject, so hopefully the answer will put things into perspective...
Why is gas still priced so high?
Q: I can't understand why the TV news says that the price of oil is about $80 a barrel but the price of gas nationwide averages $3.40 a gallon. When oil was that price two years ago, a gallon of gas was about a dollar less. Why is gas still priced so high? Also, the politicians are always talking about reducing our dependence on foreign oil and saying we should allow a pipeline from Canada to Texas and also drill offshore more. Where's the oil really coming from? Can pipelines and drilling really solve our problem or is this some sort of conspiracy by the oil industry? I just can't make sense of all this because it seems too complicated and the media reports are often conflicting or confusing. Can you put any of this into plain English? - Madeline in Boise, Idaho
A: These are indeed complex issues, so let's start with a few statistics, as of the end of 2010. We here in the U.S. consume more than 19 million barrels of oil each day. Of that, 5.5 million barrels are produced domestically and the rest is imported. Oddly enough, we export 2.3 million barrels daily, so half of the oil drilled here goes away because it'sˆ more profitable overall to put it on the commodities market than transporting it to refineries. About half of the 19 million barrels of oil is used for gasoline, another 4 million for other transportation and the rest for many other purposes.
As for foreign oil imports, we primarily concern ourselves with OPEC because most of the members are Middle East countries (although Algeria, Angola, Ecuador, Nigeria and Venezuela are members and 1 million barrels come from that country alone). Canada, believe it or not, is the largest crude oil supplier to the U.S. and half of the daily imports come from the Western Hemisphere, so this all hinges on what each of us considers 'foreign.'
MYTH: We are more dependent on foreign oil than ever before.
FACT: U.S. dependence on imported oil peaked in 2005 and has declined since then due to economic patterns and improvements in efficiency. Only 18% of our oil comes from the Persian Gulf countries. That said, in 2010 we spent $188 billion on oil from all sources outside of the US.
Still with me?ˆ OK, as to the price of a barrel of oil, the sad fact is that this has little to do with the price of gasoline at the pump, partly because of the lag time between buying a barrel and refining it. Oil is traded on the futures market, which means that speculators buy contracts at a specific price and hope to sell at a higher one at delivery time. Because of all the unrest in the Middle East this year, those speculators sent oil prices soaring for awhile. This cause refiners to raise the price of gasoline in order to hedge for future higher costs of crude oil. It's in their best marketing interest to foster the public's concern about unrest in the Middle East, so as long as that concern is maintained, the prices will stay high.
In other words, the price of gasoline is due to perception rather than real-time market realities. Therefore, oil companies charge whatever they can get away with! The good news, however, is that gas is still much cheaper here than in most other countries.
As to the politicians' cries for pipelines and expanding drilling operations, my 60+ years living in Washington DC observing how the system works taught me to ignore whatˆ ˆ they say; instead, always follow the money. In this case, bear in mind that the oil and gas industry pays more than $120 million yearly in salaries to employ hundreds of lobbyists in Washington DC. It's their job to bombard Congress and the Senate with their points of view, in addition to contributing vast amounts of money to their campaign funds. The oil industry lobby is the fourth largest in DC, overshadowed only by the banking/finance, insurance and pharmaceutical industries, so it's no surprise that the middle class has lost trillions in net worth and our costs for energy, health insurance and prescription drugs are the most expensive in the world. Washington is out of touch with the citizens of this country because politicians no longer have our interests at heart. Things are the way they are because powerful interests want it that way, so when you hear someone on Capitol Hill say something you that you can't believe he/she's saying, go online and look up who their major contributors are.
Obviously, more drilling and building pipelines will increase the amount of oil, but that oil will go onto the world commodity market, just as those 2.3 million barrels we drill here every day - and then export - do now. I see no reason to believe that either measure will result in lower gas prices, just higher profits for the corporations, transporters and middlemen.
To answer your initial question, gas prices are still higher than you would expect because the marketers noticed that people's driving habits didn't change significantly when per-gallon prices at the pump hit $4. Prices will fluctuate, of course, but will continually trend higher as oil supplies dwindle and costs of getting to them grow.
So what can we do to keep our fuel costs down? Well, the only effective way to address this pressure is to buy the most fuel-efficient vehicle you can afford and use it as sparingly as possible.
Dr. Crankshaft is automotive writer, radio host and restorer Les Jackson. In addition to writing for newspapers, he's editor-in-chief of www.secondchancegarage.com, the web's first all-restoration subscription site, and co-host of 'Cruise Control,' heard Saturdays from 10-noon EST on the USA, National and Cable Radio networks. You can also listen live at www.cruisecontrolradio.com or download podcasts from iTunes. Send your questions to Dr. Crankshaft at DrCrankshaft@AutoWritersInk.com; please include your name and a location.