President Bush just met with King Abdullah of Saudi Arabia to request a 1 Million barrel per day increase in OPEC's daily production levels. Knowing their biggest customer was coming in to complain about the price at the pump, the Saudi's preemptively announced a nominal 300,000 barrel per day production increase. Personally I think Bush looked like an idiot going to the Saudi's to ask for a production increase. That request could have easily been made from a secure line at 1600 and in fact it has been, but since he was in the neighborhood and all...
So, what do we do? What can Washington do? Produce more crude? Import more? Tax big oil? Enact a fuel tax moratorium? Go back to OPEC every couple of months, hat in hand, and prostrate ourselves at the feet of the Saudi's we made billionaires for a few more drops of that precious light sweet crude so many of us are addicted to? I don't think so. Conservation should without a doubt be the core of our energy policy but it will take more. It will take a commitment to fund and develop a viable alternative and it will require the American consumer to demand it.
Here's a little trivia question for you. How many gallons of gas can be made out of a barrel of crude? A 42 gallon barrel of crude will only make 19.5 gallons of refined fuel. OPEC's 300,000 barrel per day increase equates to roughly 650,000 addition gallons of gas per day, but as with all things in life, it's not quite that simple. Our energy problems are multi-faceted and unfortunately, none of them are easily solved. There are many factors which are totally and completely beyond our control or influence.
One of the major challenges we face is U.S. refining capacity. There are roughly 151 refineries in operation in the United States today; a 50% decrease since deregulation began in the early 80's. Marathon Oil holds the honor of having built the last refinery on US soil in Garyville, Louisiana in 1976, some 32 years ago. Only one application has been filed with the US Dept. of Energy since then and it's dying a painfully slow death in litigation.
Thanks to the Clean Air Act and an estimated $4 Billion - $6 Billion price tag to bring a new refinery online it's unlikely we'll see a new one anytime soon. With current refiners operating at nearly 100% of capacity, it's not going to do us much good to increase production. We can have all the crude in the world but without the ability to refine it, that Saudi oil might as well still be sitting beneath the Arabian sand. A few of the major players such as Motiva and Valero are spending billions to expand some of their current facilities to handle up to an additional 2 Million barrels per day with an eye toward completion between 2010 - 2012.
Beyond refining capacity we have to look at who else is standing at OPEC's door. While we are by far OPEC's largest customer, we're but one of a growing number of countries for whom crude is a seemingly unbeatable addiction. China, Japan and India, for example, are putting serious pressure on global supplies. China's oil consumption is growing by roughly 8% per year, which is more than 7 times the annual US consumption growth rate. Think real estate - more buyers willing to pay the sellers price inevitably leads to a higher sales price, right? Oil is no different.
Other factors that contribute to high prices at the pump include:
* Reductions/disruptions in production - OPEC is in business for OPEC. Increasing production only serves to drive the price of a barrel of crude down; it's not in their best interests. We've also seen significant disruption in supplies from South America.
* Natural Disasters - Refiners took a direct hit with Hurricanes Katrina & Rita. Every time we have to take a refinery offline it costs millions upon millions of dollars and perhaps more importantly, it costs time.
* Transportation costs - 50% of US domestic production is in the Gulf Coast. Shipping capacity for the remainder is difficult and expensive to coordinate as the available tankers are reserved for the foreseeable future despite a near tripling of transportation costs. One estimate puts the price tag at $12 Million for a tanker to deliver crude from Saudi Arabia to the US Gulf Coast.
* Local/Regional Environmental Regulations - California, for example has stringent requirements for special blends which are very expensive to produce. Complying with the various state and federal rules with respect to blends and additives in relatively small batches is expensive and time consuming.
* Taxes - The average gallon of gas has approximately $0.42 in taxes tacked on. There are several trains of thought on whether eliminating (or reducing) taxes will have a positive or detrimental effect, but that's for another day.
* Strategic Petroleum Reserve - Personally I've never seen any data that showed this to be a major factor, but mention it because some will. An increase to 76,000 barrels a day was to begin flowing into the Reserve as of July but has been suspended. With U.S. consumption at just shy of 21 Million barrels a day SPR is truly a tiny blip.
The next time you go to the local filling station to fill up the buggy, keep in mind that knee weakening number you see on the sign by the road is not artificially inflated to make the big oil boys balance sheets look better. It's market driven. While the President makes a good punching bag and admittedly I've thrown a few, there's precious little the current or incoming occupant of the White House or the bloviating windbags on the Hill can do to effect a change in the price of a gallon of gas.
Want to know the solution to our energy crisis? Focus on conservation, fund R&D for viable alternatives to fossil fuels, reduce restrictions on offshore drilling, provide incentives for deep water drilling in the Gulf such as the Jack oil Fields, open ANWAR, give producers the green light to build additional refineries and focus on solar, wind and nuclear power. Then tell the Saudi's to sick it up their... turban's. Anyone see all that happening? Me either.
Sorry for the long (some will silently claim) boring post but I've read one too many posts this week bashing the current Administration and/or Big Oil for the price at the pump.
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