The Price of Oil

Tune into the news networks these days, and you will find the usual litany on high gas prices, which peaked nationwide at just over $3.00 per gallon several weeks ago. There are plenty of reasons for the high prices: Hurricanes Katrina and Rita impaired domestic refining capacity, and prices rose to reflect this shortage. Geopolitical forces constantly impact the price of oil. As President Bush noted in 2003, “Sometimes we import from countries that don’t particularly like us.” America remains reticent about one very real reason for rising prices: long-term declining supply worldwide. Oil is a nonrenewable resource, destined for depletion at some point. Peak oil is defined as the point at which half of the recoverable oil in the ground has been used. Rewind to the 1940s when M. King Hubbard, a geologist working for the Shell Corporation, noted that oil production from any given oil field traced a bell-shaped curve. His discovery showed that extraction was initially slow. It increased as infrastructures were built, leveled off, then began to decline as extraction became difficult. In the United States, oil discovery peaked in the 1930s, and production subsequently peaked around 1970; the US made up for the difference by importing oil. Worldwide oil discovery peaked in the 1960s, but extraction and use has been increasing ever since.Oil company executives recognize the uncertain future of their product; in 1999, Mike Bowlin, CEO of ARCO, commented, “We’ve embarked upon the beginning of the last days of oil.” Chevron’s, “Will You Join Us?” campaign states that “the era of easy oil is over.” Indeed, oil exploration comprises an increasing share of corporate expenses, and oil production is declining in 33 of the world’s 48 dominant oil producing countries.In other words, few people dispute that the wells will eventually run dry; the argument is over when this will occur. Estimates of when oil production will start to decline vary wildly. Optimistic estimates have predict the oil supply will last until about 2037, while more dire scenarios suggest that supply will wane within the next few years. Skeptics of peak oil maintain that there is still plenty of oil left, depending on how much consumers are willing to pay both financially and environmentally. Much of the oil currently being discovered is increasingly inaccessible often located offshore, in environmentally sensitive areas, or locked in tar sands. The latter source, essentially oil-coated sand, is thick enough to mine and requires vast amounts of money, water, and energy to extract.Meanwhile, concerned groups note that nearly every sector of the American economy and lifestyle is dependent on oil. The roughly 300 million American citizens consume about 20 million barrels of oil every day. According to the Energy Information Administration, 44% of U.S. oil consumption is related to motor vehicle usage, with an average fuel efficiency of about 21 miles per gallon. This dependence on petroleum is largely made possible by the relatively low price of oil in the United States. The EIA places the median price at the pump in America at $2.38 per gallon, 25 percent of which is taxes. In contrast, Europeans spend an average of $5.00 per gallon of gas, almost sixty percent of which is taxes, including a consumption tax. Europeans have responded to high gas prices with numerous lifestyle changes, including purchasing smaller, more efficient vehicles, using alternative forms of transportation, and focusing on urban development.Critics of consumption taxes argue that these taxes unfairly influence market forces, and maintain that increasing oil prices will harm the American economy. According to a report by the International Center for Technology Assessment, oil prices are already influenced by federal and state subsidies over $74 billion annually. These include tax breaks for oil companies, program subsidies for exploration and extraction, and military protection subsidies. These tax subsidies help to lower the price of gas for consumers; being federal subsidies, though, they are paid for by taxpayers. According to the report; “the ultimate result . . . is that consumers have no idea how much fueling their cars actually costs them.” ICTA thus recommends eliminating subsidies so that “consumers would see the entire cost of burning gasoline reflected in the price they pay at the pump.”