Oil

The subject of oil is on everyone's mind as the prices of crude oil and gasoline seem to make new highs every day. As we all know, oil ( and other hydrocarbons) is what makes our economic engines run in the US, along with coal, a little nuclear, and wind power (which is moving up).

Oil has always been controversial. It has always been a political football. Everyone wants it, but nobody wants to pay for it.

From WW II until the early 1970s, oil was very cheap, and we and much of the rest of the developed world became hooked on it. For all of those years, there was a large surplus of supply, so much so that for most of those years, the State of Texas acted as a cushion, as it were. It limited production when the then low price was threatened by oversupply, and it increased production when supplies were reduced, such as when the Suez Canal was bombed in the 1950s.

As a result, the price of crude oil at the wellhead remained between $2 and $3 per barrel in the decades before 1973.

About that time, the productive capacity in Texas and the US reached the point where imports became necessary. Suddenly, the producers of last resort became the OPEC countries. The ability of US producers to have any effect on the price of crude disappeared, and OPEC, and particularly Saudi Arabia, began to limit production to force a higher price. They continue to do that, although there is much evidence that oil production in the world is near a peak.

During the last two decades, the Third World, and particularly China, has rapidly developed. Along with that development has come an insatiable thirst for oil. The huge increases of demand from those countries has begun to overwhelm the supply. Now there is no cushion of supply.

Simple high school economics should tell us that in these circumstances the price is going to go up until such point that the price begins to reduce demand. This is far too elementary for some to grasp, unfortunately.

With that very brief overview, let us go to today's New York Times. They have several items on the subject.

The first one I came upon is : Gas Prices Expected to Peak in June. I guess a peak is good, but would be expected. They note that demand in the US is headed down:

"...In its monthly report, the Energy Department projected that domestic petroleum consumption would decline by about 190,000 barrels a day this year, a result of the economic slowdown and high prices. That is a sharper drop than the 90,000-barrel-a-day decline projected by the department last month.

After accounting for increased ethanol use, domestic consumption will fall by 330,000 barrels a day, or less than 1 percent of total gasoline demand. While limited, it would be the first annual decline in gasoline demand since 1991....."

So, supply and demand concepts are at work, but watch out. China's demand is rapidly increasing:

"....Despite these higher costs, global oil demand is still projected to rise by 1.2 million barrels a day this year, mostly because of growing consumption in China, the Middle East, Russia, Brazil and India.

"China alone will account for a third of the jump in consumption. In March, Chinese imports rose by 800,000 barrels a day, compared with levels a year earlier, a big increase that could mean China is filling its oil reserve needs before the start of the Olympic Games this summer....."

The real kicker is that supply is also falling:

"...Members of the Organization of the Petroleum Exporting Countries pumped an average of 32.1 million barrels a day last month, down 320,000 barrels from March, according to the survey of oil companies, producers and analysts. ...."

The conclusion is not good news:

"...Analysts’ forecasts for the price of gasoline over the next few years run as high as $7 a gallon."

Nowhere is there a mention that the oil companies are responsible for the price increase (and they are not).

The next article is entitled : Stocks Decline as Oil Prices Head Higher . This makes sense. The nearly one trillion dollars we are sending overseas for oil is like a huge tax, and is going to severely effect the economy. That is an easy one.

Last, but not least, is the one entitled: Senate Democrats Unveil New Energy Tax Plan . It seems that the Democrats of the United States Senate have determined that the solution to the high cost of oil is to tax the Hell out of the oil companies. Look at the article and see what they want to do:

"Democrats in the U.S. Senate on Wednesday unveiled a new energy package that would revoke $17 billion in tax breaks extended to big oil companies like Exxon Mobil Corp and slap a 25 percent windfall profits tax on firms that don't invest in new energy sources....."

This, of course, will drive prices higher, and will not serve to increase the supply. It is a completely political proposal by those morons, intended to cast the blame on Bush and the Republicans for the current high prices, even after these same morons have opposed every proposal in the last thirty years to increase US production.

This blog is too long, and I will close, but will return to the issue soon. Until then, we all must realize that we must do something constructive about energy in this country, and leave the petty and idiotic political posturing behind us.