Gas, oil and the boogeyman
There has been a lot of noise, grumbling and complaining about the price of gasoline and diesel fuel over the last few months. According to EIA.gov the price of a gallon of gasoline has increased $1.11 from March 9. On-highway diesel has climbed from $3.09 on March 9, 2010, to last week's price of $4.06. These increases have not gone unnoticed by consumers and like all consumers do, we are looking for someone to blame--the boogeyman...or Big Oil.
As usual we are not going to venture over into the political side of the debate about who is to blame for high gas prices. There is no doubt plenty of blame to go around and that includes the end consumer. America is by far a nation of casual drivers. We don't like to carpool, we don't embrace mass transit and we don't like to have our lifestyle cramped by high energy prices. Long-term low gas prices and blossoming infrastructure allowed for us to drive farther in less time and allowed for our communities to spread out. Thus, the daily commute was born.
We want to take some time to look at two components of the pricing on fuel. First we will cover where the oil we use comes from, then whether our addiction to foreign oil is as severe as we are told.
Did you know that 41 percent of all the imported oil for the United States comes from three countries that are not geographically in the Middle East? Canada supplied 22 percent of total U.S. imports in 2010. Mexico supplied 11 percent and Venezuela sent us just 8 percent. One could argue that Venezuela is not as friendly as we would like to us, but we are a good paying customer. Our two largest suppliers in the Middle East and Africa are Saudi Arabia and Nigeria, each supplying 9 percent of our total crude oil needs (per EIA.gov). The other 41 percent is supplied in much smaller percentages by other countries. As the oil fields off the coast of Brazil are developed, we should see an even greater shift away from oil from the Middle East.
Much has been said about the unrest in the Middle East and how it has increased the price of oil, which has in turn caused gasoline prices to increase here in the U.S. Oil is a global commodity that we are bidding on from many sources. Until that changes, what takes place globally with oil prices will affect our bottom line on gas and diesel fuel. With all of the noise about higher prices it looks like we are not as addicted to foreign oil as we are to cheap oil.
The solution--or an idea for easing the problem--would be for the U.S. to ramp up production of our own oil. We have a great case that this will work, as the U.S. has the ability to supply its own natural gas supply within our own borders. Natural gas prices have been stable over the last year and should continue to remain so as continued exploration, increased productivity and expanding infrastructure allow for more gas to be produced, stored and distributed. Drilling for oil domestically, although time consuming, should at minimum help suppress rising oil costs.
We see this idea shaping up for the first time in at least 10 years as the number of active rigs drilling for oil has matched the number of rigs drilling for natural gas (source: Baker Hughes). This departure is far from the historical norm when gas rigs consumed around 80 percent to 90 percent of the weekly rig count throughout most of the 2000s, until around 2008. In 2008 the number of rigs drilling for oil slowly started to increase followed by a much larger increase starting in mid 2009. So when you hear that the U.S. produced a large sum of oil in 2010 compared to other years, you should be able to trace that back to the initial geological work being done in 2007, explored for in 2008 and 2009 and brought on line in 2010. It takes years for even one well to be explored, drilled, developed and put into production.
The price of oil will have to remain at elevated levels to entice not only companies but individuals to deploy capital to invest in drilling projects and the continuation of the expansion of infrastructure. The increase in the number of rigs drilling for crude oil is a step in the right direction. Demand has remained strong and shows no signs of abating. Next week we will look at the demand for gasoline and what goes into producing a gallon of gasoline.
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