Expensive gasoline: American policies may be responsible

Published 15 years ago -  - 15y ago 41

In regard to price, gasoline is inelastic. Inelasticity means that increases in price will result in decreases in usage but the decrease will be too small to affect profits.

In economic usage, ratings below 1 are considered inelastic while ratings above 1 are considered elastic. For instance: In the inelastic category, food is 4, tobacco .45, and gasoline is .2; In the above 1 category, restaurant meals are 2.3 and electricity 1.3.

Gasoline and fuel oil are only inelastic in the short term. In the long term, better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher mileage all decrease usage.  However, even when these are accomplished short term inelasticity persists. 

As the idea that the supply of crude oil is finite and dwindling is being bandied about in the press and media it is interesting to consider some of the facts. In 1982 the quantity of “proven” reserves throughout the world was estimated at 676 billion barrels. In 2002, that figure had been revised upward to 1.05 trillion barrels. Interestingly, in the interim we have used more than the 676 billion barrels estimated to be our entire potential supply in 1982 and the 1.05 trillion barrel figure is being pushed upward by both Russia and Saudi Arabia – the Russians believe their estimated potential of 180 billion barrels might be multiplied by a factor of three and the Saudis believe their 261 billion barrel estimate might actually be 1.2 trillion.

The nations with the ten largest estimated potential reserves are as follows: 1. Saudi Arabia. 2. Iraq. 3. Kuwait. 4. United Arab Emirates. 5. Iran. 6. Venezuela. 7. Russia. 8. Mexico. 9. Libya. 10. United States.

Who knows how much additional potential crude could be added to the over trillion figure if the other eight (see previous figures for Russia and Saudi Arabia) were to revise their reserves upward.

It appears that there is plenty of oil to go around and that even the increased consumption in China could easily be filled by ever increasing estimates of reserves.

Though it is tenth in estimated reserves, United States is the world’s second largest producer of crude oil producing less than 50 percent of our total usage.

When queried about the increased cost of gasoline, the oil refiners always seem to fall back on supply and demand. The largest factor, 43 percent of the pump price of gasoline, is determined by the price of the crude oil used to refine it. The next largest factor is taxes, which contribute 31 percent to the price. The remaining 26 percent is split between the oil refiners and those that distribute and market the products.

OPEC is made up of 11 oil-producing nations; it controls 40 percent of world crude oil production and accounts for two-thirds of known reserves. Before the formation of OPEC in 1946 the low price of a barrel of crude oil was $1.37. Today the price has gone as high as $40.00 per barrel.

Production of oil in Iraq has a major effect on the price OPEC can demand for crude oil.

During the Iran/Iraq war oil production fell in both countries and in 1981 the price of crude oil rose as high as $35.00 per barrel.

The current precipitous increase in crude oil prices may be a result of the policies of the American government. During the Bush I invasion of Iraq oil-producing facilities were badly damaged and efforts to repair the damage was thwarted by the ensuing embargo. The needed repairs have never been made and now that these facilities are in American hands getting them in good operating condition will require billions of dollars and a number of years. This task has been awarded to Exxon/Mobil. In the short term it will result in a continuing decrease in Iraqi oil production.

Ownership of in-ground crude oil and control of OPEC is largely concentrated in the Arab world and the Bush/Blair invasion, brutal repression and occupation of Iraq has created universal resentment and hatred for the Western World in general and for America and England in particular.

Western society and its industrial base depend on ample supplies of oil. Since demand for crude oil remains high the increased prices OPEC has set will continue to line the pockets of the Arab world as they tighten the noose around our neck.

Crude oil is a basic commodity and if prices continue to stay high it will increase costs throughout the economy. It is not unlikely that oil prices may become the whipping boy for the increase in prices our Federal Reserve System creates by inflating the currency.

Barring the success of Saudi Arabia’s attempt to increase oil production, the high cost of oil will remain in effect at least until Iraqi oil production returns to normal.

Note: British Petroleum as quoted in Investors Business Daily is the source for the upwardly revised figures on proven reserves. The From the Wilderness link appears to be in conflict.

Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact.”

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