It's been my experience that all this wondering causes people to come up with some interesting ideas about why gas prices go up and down. For instance, during last fall's midterm congressional elections, gas prices had dropped from near-record highs to around $2.25 per gallon. A work associate believed with her whole heart (and she has a big one) that President Bush was manipulating the price of crude oil. Her conspiratorial thinking led her to believe that the Bush family tapped friends in Saudi Arabia and Texas to drive down the price of oil in an effort to help the Republicans keep their majority in Congress.
Looking at this narrow time frame and considering the political happenings at that time, perhaps she was right. Stranger things have happened in politics and business. However, her theory seemed too simple to be plausible. But it did get me thinking.
To begin, let's look at some common beliefs people have about the gas prices.
Theory 1: Gas would cost less if President Bush weren't making his oil buddies richer.
The last time I checked, Bush didn't count the Saudi royal family, Mexico's Felipe Calderon, Venezuela's Hugo Chavez, and China's Deng Xiaoping as his close friends. These leaders control the four largest oil producers in the world; the nationalized oil companies of Saudi Arabia, Mexico, Venezuela, and China. The fifth largest oil company is British Petroleum (BP). ExxonMobil is number six, followed by Royal Dutch/Shell, the Nigerian National Oil Company, and Kuwait Petroleum. Of these top nine oil producers, only ExxonMobil is an American company, and Bush exerts little influence over this multi-billion dollar free-market entity. Realistically, no reasonable person can think that Bush would want to do anything to help the companies listed here.
Additionally, it's important to compare the profit margins of companies before accusing oil companies of gouging consumers with Bush's aid. In 2005, Citigroup banking company posted a profit margin of 33 percent. Coca-Cola and Procter & Gamble posted profits of 21 percent and 14 percent respectively. ExxonMobil's profit was 11 percent while Chevron’s was only 7 percent. In light of these facts, maybe Bush’s friends are running Citigroup?
Theory 2: We get most of our oil from the Middle East, and they're charging us more because they hate America.
While some pundits put forth the idea that every country hates America, the fact is that oil is a global commodity. Furthermore, oil is sold to companies, not to countries. Therefore, Iran can't punish the U.S. by charging U.S. companies one price, and non-U.S. companies something less. In the reality of the world's global marketplace, if Iran tried such a stunt, U.S. oil producers would simply buy their crude someplace else.
However, the U.S. (and world) markets for oil are affected by what goes on in the Middle East. That region is the world's largest producer of oil. According to most estimates, more than 40 percent of the world's oil reserves are under Middle Eastern sand. Therefore, if production from that region declines or is intentionally restricted, it increases prices in the U.S. and across the globe.
In 2005 the U.S. supplemented its own oil production with imports from Canada, Mexico, Venezuela, Nigeria, and Saudi Arabia. These five countries were the largest on a list of dozens. In total, imported oil accounts for approximately half of all crude used in the U.S.
Theory 3: The world is running out of oil, so it is more expensive because it will all be gone soon.
Predictions are risky because one can only review their accuracy in hindsight. For instance, back in 1874, Pennsylvania's state geologist predicted that the nation's oil supply could only fuel the country's kerosene lamps for four years. Same goes for frequent predictions made between the early days of the oil business and today. It seems that there were always "experts" who "knew" the oil supply would last only a few more years. During the 1973 Arab oil embargo, some "experts" forecast that the last oil would be pumped from the Earth early in 2000.
So how much oil is there in the ground? The answer is actually impossible to quantify. Available estimates range wildly.
"While it is highly likely that oil will become more expensive to produce, we will not physically run out" in 50 to 100 years, said Mike Toman, director of the Environment, Energy and Economic Development Program at the RAND Corporation. "It's also important to recognize that the rising cost of conventional crude oil will stimulate all kinds of other energy options," Toman said. "These would include the liquefaction of coal or biomass, alcohol fuels, and other alternative energy sources."
What about the vast oil reserves contained in Canada's sand tar and the U.S.'s own recently discovered oil shale deposits? This last discovery alone, by one estimate, could satisfy the world's oil demands for a century. Toman cautions that there are many challenges around extracting oil from oil shale, so at this point we should not be overly optimistic about a quick fix from that resource.
However, Toman's comments bring up Adam Smith, a British economist who wrote extensively in the 1700s. If you didn't sleep through high-school economics, you'll recall that Smith is most famous for his understanding of supply and demand. In his writings, Smith described an economic process by where an "invisible hand" pushes entrepreneurs into areas of business where demand and prices are high. The goal for entrepreneurs is always to develop a lower-priced alternative to the existing product. At the same time, another invisible hand pushes consumers toward lower cost substitutes and away from items that they feel are too expensive. Got the picture? As gas prices remain above recent historical averages, people will work to find less expensive acceptable alternatives.
Between existing oil reserves and entrepreneurs' efforts, nobody need worry that we're going to run out of "fuel" during our lifetime. It's just not gonna happen.
Rex Roy is a Detroit-based automotive writer and journalist. His new book, Motor City Dream Garages , will be on shelves in November.
