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Thursday, March 10, 2005

The Rising Price of Oil

The chatterati are all a-twitter with the news of rising crude oil and gasoline prices as we inch toward summer. Politicians are demanding that President Bush release oil from the SPR, in order to bring prices down.

In September of 2000, President Clinton authorized the release of 30 million barrels from the SPR. In essence, it was a zero-interest loan to oil companies. They could refine the oil, but had to replace it by 2001. The effect on the price was negligible. I looked at data obtained from the Bureau of Labor and Statistics. Unfortunately, their content is dynamically generated, so I can't give you a permalink to the data. I did create a Microsoft Excel file that you can download and examine for yourself.

So in order to actually have an effect on prices, a great deal more oil will have to be released from the SPR. But even if all that oil is released, will US refineries have the capacity to refine it? Production is stagnant in the US; a new refinery hasn't been built since 1976. All things being equal, then, supply in the US is pretty much constant. Given constant supply, and rising demand, there is only one place for prices to go.

If I were an advocate of alternative energy sources, as many on the sinestra side of the aisle proclaim to be, this development should be welcomed. After all, if the price of gas climbs high enough, people will not use as much of it; and the higher it climbs, the more likely consumers will be to seek out substitutes. Look at it this way: If hamburger hits $5.99/lb., that ground turkey is going to start looking pretty darn good.

What about the secondary effects of rising oil prices, such as the increased cost of producing electricity? Again, higher prices should lead to lower consumption. But I have a hunch that the demand for electricity is, for the most part, pretty inelastic, and people will pay the higher prices, and manufacturers will be forced to either absorb those costs, or pass them along to the consumer, which opens a whole 'nother kettle of fish.

What needs to be done to mitigate the effects of the rising price of oil? For one thing, there needs to be viable substitutes. Building nuclear power plants might reduce the demand for oil, but we can't build them. Adding refinery capacity would be another solution, but let's face it, that ain't going to happen. We can try to find new supplies of crude oil, but I seriously doubt that is going to happen. Hydrogen? Last I heard, creating nitrogen fuel cells required energy, created by (you guessed it) oil.

What to do, what to do? We haven't even touched on the runaway demand from China, which is yet another factor in rising oil and gas prices; nor what might happen once Iraq is stabilized, and a dependable flow of oil starts coming out of the Persian Gulf again.

Still and all, adjusted for inflation, prices now aren't that much higher than they were 30 years ago. I recall gas being about $.75/gallon in 1978 (or thereabouts). In 2005 dollars, 75 cents translates to about $2.14, or slightly more than we're paying right now (at least in Montana).

If we really want to get those gas prices down, we need to approach the problem from all angles: 1.) find new sources of oil; 2.) get over our collective fear of nuclear power; and 3.) ensure that the oil supply we do have right now remains stable.

Then again, I could be wrong.

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