Tuesday, April 24, 2012

The 2012 Election Day Lesson for Oil and Gas Economics 101

Welcome to the 2012 lesson on Oil and Gas Economics 101 in preparation for Election Day, November 6th, 2012. Please use this material when making your selections for local, state, and federal candidates. Your final price at the pump will be affected by a right or wrong answer for any of the candidates in those categories.

Consumer Reports says the average price for a gallon of regular gasoline in the United States was $1.85 when President Obama took office on January 20, 2009.[i]

The AAA Daily Fuel Gauge Report says that the cost of a gallon of gas on April 22, 2012 was $3.86.[ii]

On January 23, 2009, the price of a barrel of crude oil was $46.47. By April 20, 2012, the price per barrel had climbed to $103.88.[iii]

So, from Inaugural Day 2009 to April, 2012, the price of a gallon of gasoline increased 209%, but the price of a barrel of oil actually had a significantly higher increase of 223%.

Thus, the price of a barrel of oil bears no direct economic relationship to the price of a gallon of gasoline.

But have our gas costs increased because of increases in the costs of producing a barrel of oil?

The Department of Energy says the average global production cost for a barrel of crude in 2003 was $17.45. In 2009, (the most recent year that the figures are available) the average worldwide production cost was estimated at $28.35 per barrel.[iv] Assuming the cost of production increased from January 2009 to April 2012 by the same amount as our Consumer Price Index, a 7.4% increase, the total production cost is now around $30.44 per barrel.

Therefore, the $17.45 cost of producing a $27.69 barrel of oil was 63% of its sale price in 2003, but by April 2012 the $30.44 cost of producing its $103.88 barrel of oil was proportionately much less, only 29.3% of its sale price.

So, we see that the cost of producing oil has absolutely nothing whatsoever to do with the increasing price of oil.

Perhaps a scarcity of the future supply of the raw materials of production, the proven oil reserves, is a likely speculative cause for the gasoline price increase?

Worldwide, in 1973 there were just over 600 billion barrels of petroleum proven reserves[v] known to exist. Today, that number has doubled to 1,317 billion barrels[vi].

Here in the United States, in 1944, we had 20,064 million barrels of known reserves, and we now still have 20,972 million barrels of known reserves.[vii] Despite the United States producing 167 billion barrels of oil between 1945 and 2010, our exploration and development has kept pace with our consumption.[viii] The “proven reserves” number, therefore, has nothing to do with the actual amount of commercially viable U.S. petroleum reserves.

And, since we see that in the past 65 years we have actually produced 8 times our proven reserves and our proven U.S. reserves number has remained unchanged, we have also learned that the apparent present availability of the proven oil reserves has no connection whatsoever to the increasing price of oil.

For the multiple choice final exam coming up on Election Day, here is the key to selecting the correct answer: If a candidate for any office suggests that the reason for our high cost at the pump is a) because it costs too much to produce the fuel, or b) because we are running out of fuel, that candidate would be the WRONG answer.

[i] “Average Gas Prices, January 19, 2009”, Consumer News, Consumer Reports, January 21, 2009. http://news.consumerreports.org/cars/2009/01/gas-prices-2.html
[ii] http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp
[iii] http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp
[iv] “ Oil and Natural Gas Production” http://big.assets.huffingtonpost.com/06_production.pdf
[v] http://www.globalpolicy.org/socecon/envronmt/general/2007/10oilstudylong.pdf, Figure 12: Development of proved reserves of oil worldwide according to public domain statistics
[vi] http://www.eia.doe.gov/emeu/international/reserves.html
[vii] http://tonto.eia.doe.gov/dnav/pet/hist/mcrfpus1M.htm Table, U.S. Crude Oil Proved Reserves (Million Barrels)
[viii] “Exposing the 2 Percent Oil Myth”, March 13, 2012, http://www.instituteforenergyresearch.org/2012/03/13/exposing-the-2-percent-oil-reserves-myth/