Saturday, May 5, 2007

If it’s not one thing, it’s another…

Gasoline prices are closing in on last years record, or may, as I write this, surpass that record. Yet crude oil is roughly $15 below last years record. What gives? Not enough gasoline, that’s what gives. A little know fact is that the U.S. imports gasoline, as well as crude oil. Our current refining capacity is insufficient to meet peak demand so we import the difference. Mix in some refinery problems and a decline in gasoline imports and -Voila! - $3+ gasoline. Now, mix the summer driving season in with that recipe and -POW - $4+ gasoline? (I am talking national average here, my apologies to California where prices in this scenario would approach $5.) Maybe, what with refinery problems and gasoline import declines…What if the prices of crude oil rose to a new record this summer? That could really make things interesting.


I spend a lot of time on my hobby farm in Middle Tennessee. For someone born and raised in New York, it is almost like living in another country - with the convenience that everyone speaks my native language. A sign on the back of a pick-up truck driven by a young man near Nashville really struck me. I will quote the sign as best I can from memory:

“The major oil companies really stand behind their customers.
Bend over, America.”

I was amazed by the sense of entitlement that the author of the sign, and the owner of the pick-up, possessed. It seemed clear to me that an expectation of cheap and abundant fuel has become an American birthright, and that if prices are high, or go higher, or if shortages appear, it must be that someone, somewhere, is screwing the American people. As if the Oil and Gas industry was a giant utility, and the price of its product should be regulated. Someone should do something about this!

This kind of provincial thinking is to be found across the country, and it is going to cause us all a great deal of grief. America, we have a problem. If OPEC is pumping at full capacity, then free markets, and ONLY free markets are setting the prices of fuel. Of course, OPEC could further manipulate prices higher, at least in the short run, by cutting production, but it appears that they are no longer able to manipulate prices the OTHER way – by INCREASING production. As Dr. Ken Deffeys of Princeton University recently said:

“The good news is that OPEC is no longer in charge of the price of Oil. The bad news is now NOBODY is in charge of the price of oil.”

The February 2007 world production numbers for crude oil and condensate, and NGPL (natural gas plant liquids) will be out any day now on the EIA website ( The world has been unable to increase production since May, 2005 with data reported through January, 2007. If this trend continues for the next couple months and we have a full 2 years of production numbers showing no increase in production despite tremendous price incentives, and considering that we will have burned about 62 BILLION BARRELS OF OIL (about the same as Russia’s entire reserves) during that time (while “only discovering” about 16 billion barrels) it would be difficult even for the “cornucopians” to deny the possibility that we have indeed reached the peak in world oil production.

I look forward to those numbers with great anticipation.

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