Rising Gas Prices: Good News and Bad

oil breakdown

Accounting for Rising Prices

Retail gasoline prices are up for 10 consecutive weeks and reaching their highest level since October.   and  explain who benefits from high gasoline prices.

Figures compiled by Sageworks show:

  • 68%: the largest cost goes into the actual commodity.
  • 13% go to taxes
  • 8.5% goes into distribution and marketing.
  • 8% goes into refining.
  • 2.5%: The smallest portion goes towards a profit for your local gas station.
Many are scratching their heads because prices are continuing to rise even though the US is now producing more than half the oil it consumes. In fact, the nearly 800,000 barrel per day increase in U.S. production output from 2011 to 2012 was accompanied by the largest one-year jump since oil drilling began in 1859.  What’s behind today’s rising prices?

1. Declining Global Demand

One reason is that, while the U.S. Energy Information Administration projects that U.S. oil production will rise from 6.89 million barrels per day in November 2012 to 8.15 million by December 2014, the International Energy Agency has lowered its estimates for global demand. This fall off in demand has led OPEC to reduce production.

2. Financial Speculation

Follow the money and you’ll notice a dramatic shift in the financial markets for oil.
  • Commercial end-users of oil such as airlines and trucking companies once dominated 70% of the market for future deliveries of oil.
  • They now represent just 30%.
  • Today, noncommercial financial speculators dominate 70% of the market.

Who are these speculators? The trading is dominated by Wall Street banks, hedge funds and other financial institutions that have no intention to take delivery of the oil needed to make gasoline. According to Bart Chilton, a commissioner at the Commodity Futures Trading Commission:

It’s speculators who are moving markets. They are almost exclusively the entire market at certain periods of time.

The price of crude oil accounts for 76% of the costs at the pump, and traders have to speculate on what the demand will be after refinement, weighing both the current and future supply of crude oil. This is the element of pricing that is behind the spikes we see today. Uncertainty around the major oil producing nations – Iran and Syria – raises questions over whether future supplies will remain constant or decrease as a result of military actions and sanctions.

3. Shrinking Supply

To hear the oil barrens tell it, the U.S. could make progress toward becoming a price leader rather than a price follower by developing its oil reserves. 

The argument is that North America is teeming with new energy potential because of recently-developed drilling techniques that have made previously unrecoverable resources viable, and that more environmentally lax government policies can  increase America’s ability to contribute to the global oil supply through new exploration policies and put downward pressure on the price of crude.

Why “Drill, Baby, Drill” Isn’t the Answer

The problem with this analysis is that this dream scenario will never come to pass because the costs of developing these reserves are much too high to make this economically viable in the long term.  To make tapping these resources economically viable for oil companies would require large infusions of government money in what is essentially a 19th century fuel. The oil lobby is already calling for more tax breaks, and will continue to clamor for more American tax dollars. Considering the enormous potential for renewable energy, this would be throwing good money after bad.

The reality is that viable sources of oil reserves are depleting, and the middle east is an area fraught with political uncertainty, and, as a result, oil prices will only continue to rise. Given this reality, the answer to the energy dilemma is greater investment in 21st century technologies to exploit renewable energy sources.

Moving to The Fuels of the Future

Rising oil prices, security risks associated with petroleum dependency, and the increasing environmental costs of conventional fuels provide growing incentive for the United States to expand its renewables use. 
A report by the Worldwatch Institute and Center for American Progress (CAP) details the progress and potential of renewable energy in the United States. The report, titled “American Energy: The Renewable Path to Energy Security,” shows that technologies that harness renewable energy sources — including wind, solar, geothermal, and bio-power — are quickly becoming cost-competitive with conventional fuels.

Not only does the development of renewable energy sources make sense for energy and the

environment, it’s a source of economic prosperity.  For example, as Germany pushes toward energy independence, its photovoltaics industry has grown by over 67% percent in the past five years, creating 20,000 jobs in the last three years.

Ready to Take Off

Renewables today provide just 6% of U.S. energy, but they are poised to expand greatly in the near future, according to the report.  Rhone Resch, President of the Solar Energy Industries Association, likens the potential growth of renewables to that of the mobile phone industry boom.

The report shows that, since 2000:

  • Global wind energy generation has more than tripled
  • Solar cell production has increased six-fold
  • Biodiesel production has expanded nearly four-fold.

And, as the report points out, the United States has some of the best renewable energy resources in the world:

  • 25% of U.S. land area has winds strong enough to generate electricity at the same price as natural gas and coal
  • 7 states in the Southwest alone have the potential to provide 10 times the current electric generating capacity through solar power.

California already gets 31% of its electricity from renewable sources, and all but four states are offering incentives to promote renewable energy efforts.

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