When you allow yourself to be backed into a corner you suffer the consequences in the form of higher prices, and that is basically what has happened to the price of gasoline in the United States.
The retail price of a gallon of gasoline in the United States is split as follows:
- 13% – Taxes
- 11% – Distribution and Marketing
- 8% – Refining
- 68% – Crude Oil
Source: United States Department of Energy
The United States only produces 5.1 million barrels of crude oil per day, while our petroleum consumption exceeds 20.6 million barrels per day.
By using considerably more oil than we produce, the U.S. has to import oil in order to meet our daily needs. At one time the majority of our oil imports came from the various OPEC (Organization of the Petroleum Exporting Countries) but, we only import 5,517,000 barrels of crude per day from OPEC. Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates (UAE), and Venezuela are all members of OPEC.
The top three suppliers to the U.S. from the OPEC group are:
- Saudi Arabia – 1,463,000 bpd (barrels per day)
- Venezuela – 1,419,000 bpd
- Nigeria – 1,114,000 bpd
The top U.S. crude oil supplier is Canada at 2,353,000 bpd and Mexico comes in second with 1,705,000 bpd. Non-Opec suppliers result in U.S. imports of 8,190,000 barrels of crude oil per day.
The largest commodity market in the world is crude oil and the leading exchanges for crude oil futures are the NYMEX (New York Mercantile Exchange) and the IPE (International Petroleum Exchange in London). Unless you’ve been on another planet, you know that oil futures hit a record high of $105.10 on March 6, 2008. There are a couple reasons why oil futures continue to rise and hit a new high.
First is the increased world demand for oil – to that end, the United States, who uses 25% of the world oil supply, requested OPEC to increase production quotas at their Meeting of the Conference of the Petroleum Exporting Countries (OPEC) on March 5, 2008 in Vienna. The conference decided to maintain current production levels and not increase OPEC production as had been requested. Current commercial oil stocks are above their five year average, so they did not see the need for the increase, especially with the economic slowdown in the U.S.
Second is the fall of the U.S. Dollar compared to other currencies. Investors are able to purchase more oil futures with their currency than we are with the U.S. dollar. We’ll use the Euro as an example – As of this morning, the Euro has one and a half times the buying power of the USD. 1 USD = 0.648638 EUR – 1 EUR = 1.54169 USD (Live rates at 2008.03.08 17:34:30 UTC)
Since crude oil represents 68% of the price of a gallon of gasoline, the key to understanding fluctuating gasoline prices, is to understand the impact various global/national events have on the price. For an example, we’ll use changes in the past 7 years – the period of time that President Bush has been in office.
The first year President Bush was in office was 2001 and at the end of the year the average spot price for an imported barrel of crude oil was $15.86 (December 2001). By December of 2007 the average spot price for an imported barrel had grown to $73.33 (December 2007).There are many factors that influence the price of crude oil and we’ll use 2002 as an example because in 2002 the price of crude oil almost doubled, going from $18 per barrel in January to $34 per barrel in December.
In April of 2002 Saddam Hussein suspended Iraqi oil exports for a period of one month. The U.S. was importing 795,000,000 barrels per day from Iraq and the suspension, along with the Venezuela labor strikes in late 2002, created a shortage of crude oil that virtually shut down crude oil production and exports to the U.S.
At the same time, the administration changed the policy on Department of Energy scheduled deliveries to the SPR, Strategic Petroleum Reserves. Prior to 2002 oil companies were allowed to defer deliveries to the SPR when short term oil prices were high compared to long term prices.
The oil companies were allowed to deposit extra oil to the reserves at a later date, to make up for shortages. When the oil companies are forced by the government to fill the SPR with higher priced oil, instead of being able to use federally-owned oil from offshore oil leases, and selling the higher priced oil on the open market, it ends up costing taxpayers more. Over the three months in 2002, filling the SPR with the higher priced oil, ended up costing consumers an additional $100 million dollars.
In December of 2002 Saddam Hussein refused to renew the U.S. oil company contracts and the rest is history, by the end of 2006 Iraq oil exports to the United States had dropped to 553 million bpd. We invaded Iraq in March of 2003 and have yet been able to get crude oil exports from this country up to pre-war levels of 795 million bpd. Anytime there is a pipeline explosion in Iraq, it effects the amount of oil the country is able to export.
Nigeria has been another problem area with unrest and sabotaged pipelines. Anytime there is an oil disruption it will go towards reducing the amount of oil available; thereby increasing the price. Even minor interruptions, such as a fire in a refinery within the U.S. that stops production for a day or two has the ability to affect the price of gasoline, depending upon the location of the refinery.
How much gasoline do we waste every day? In the colder states, it is not unusual to see cars running in the parking lot of the local grocery store with men sitting there waiting, probably for their wives to do the shopping. That happens now, even with gasoline headed for $4.00. When it hits $5.00 a gallon maybe we can figure out a way to cut down.
Following are some suggestions:
1. Let the wife go grocery shopping by herself if she can drive.
2. Let the husband do the shopping – obviously he can drive himself.
3. Get out of the car and go into the store together — turn the engine off.
4. Make fewer trips.
5. Turn in the Hummer.
This country has known for decades that we either need an alternate energy source, or we need to build more refineries to increase production, yet here we are caught between a rock and a hard place.
Source: United States Department of Energy – 2006 data
And Report dated March 5, 2003 – U.S. Strategic Petroleum Reserve