Everyone who drives a gasoline- or diesel-powered vehicle is well aware of what they pay for fuel at the pump. And when the price is high or increases by more than a few cents, it’s natural to look for something or someone to blame.
Unfortunately, the tendency is to place the blame for the high prices on government policies or elected officials who have little or nothing to do with affecting the price we pay for these products. This misplaced blame is largely because consumers are either uninformed or misinformed about why the cost of gas is so high or is going up and how the price of filling up our tank at the pump is determined.
Some elected politicians have taken to the airwaves and floors of Congress to voice their blame, claiming the current administration is waging a war on American energy. They assert that if only domestic oil companies were allowed to drill or frack more for oil, we’d have a quick fix to high or rising gas prices, and thereby help reduce inflation.
While this might seem like a logical fix, the reality is that it isn’t because first, domestic crude oil production has very little to do with the retail price we pay for gasoline and diesel fuel in the U.S. Secondly, domestic oil production is not constrained by any policies or regulations from the federal government. It’s the oil industry itself that is limiting it. Oil companies in this country are currently sitting on hundreds of unused leases and permits that allow them to drill for oil on public lands and offshore.
The retail cost of a gallon of gas and diesel fuel at the pump in this country is based on four main components: 1) the cost of crude oil, the raw commodity from which these fuels are made; 2) the cost of refining that oil into these fuels, including profits derived from that process; 3) the cost of distributing and marketing these fuels, including the associated profits gained by distributors and retail sellers; and 4) state and federal taxes on these fuels. The combined cost of the first three items alone accounts for 94% of the cost of a gallon of gas at the pump, and the crude oil cost itself accounts for 54% of it. Thus, it’s the single largest component of the cost we pay for gas and diesel fuel.
So, what determines the cost of crude oil? Unfortunately, the amount produced in this country is not, and unlikely will ever be, the answer. The reason is that crude oil is a global market in which the U.S. is a big consumer but a small supplier. While we consume about 20 percent of the world’s oil supply, we hold only 2 percent of the estimated crude oil reserves on earth.
This means we are a price taker when it comes to the price of crude oil. The amount of our crude oil reserves has a minimal effect on its market price because they are just too small to matter. We simply have to accept the price of oil set by the global market because we lack the market share of oil to influence it market price. We can’t unilaterally lower the global price of oil in any substantial amount even if we pump more of our own oil reserves out of the ground. And it’s the price of oil on the global market that American gasoline producers, sellers, and buyers have to deal with.
The reality is that this country simply lacks the global market power in crude oil to control, let alone have much influence on its market price.
The single biggest influencer of crude oil prices in the U.S. is OPEC, an organization of 13 countries that collectively hold the biggest oil reserves and control 40% of its global supply. It’s essentially an oil cartel; the U.S. is not a member of it.
Unlike the U.S. and the other non-OPEC countries, decisions about oil production in OPEC countries is mostly in the hands of nation-owned oil companies, which subject oil production to central coordination in response to the global market. Because they hold the largest reserves of crude oil, they effectively control its global supply and thereby have a dominant influence on the global oil market and the price of crude oil even in this country. They can increase the price of it simply by cutting production.
In contrast to OPEC countries, oil production decisions in non-OPEC countries, including the U.S., are primarily in the hands of investor-owned oil companies who perform most of our domestic oil production. They make independent, investor-driven decisions about oil production to maximize their profit and increase shareholder value. Their decisions are based largely on economic factors that benefit investors and shareholders. In the last few years, investors have been making it clear to domestic oil producers that they should not sink money into drilling for more oil in pursuit of an uncertain next oil boom, but instead pay back investors.
The inconvenient fact is that the retail price of gas and diesel fuel at the pump is primarily a function of the price of crude oil, with the result that changes in their retail price closely track changes in global crude oil prices. This means that American consumers of gas and diesel fuel are, in effect, at the mercy of both an oil cartel that uses oil supply quotas to secure the highest long-term prices for their member countries and American oil companies whose priority is to maximize their profits for investors and shareholders.
Unfortunately, too many elected politicians won’t admit these things. They want you to believe that oil and gas prices will stabilize and decline if we just increase domestic oil production … by voting for me or my party. But the inconvenient truth is that it can’t and it won’t.
The time is long overdue for politicians to be honest with the public about both what controls the price we pay for gas and diesel fuel at the pump and how dependent that price is on the global market price of crude oil. The inescapable fact is that if we continue down the path of a crude oil-powered future for our transportation system, we are locking ourselves into higher cost for the long haul for fuels derived from a limited and non-renewable resource. But you’ll be hard pressed to find a politician with the courage to admit this.
To move our transportation system away from its dependence on crude oil, we can and should continue transitioning it to one that is more energy efficient and is based on renewable energy sources that are not only less costly, but also both environmentally cleaner and sustainable. This is necessary if we are to insulate and shield the energy costs of our transportation system from the self-interests, motives, and oil market power of the OPEC cartel. It is also vital to our present and future national security.
The Open Dialogue Discussion Group includes Jerry Elwood of Kalispell, Alex Berry of Kalispell, Bob Brown of Whitefish, William Dakin of Bigfork, Dan King of Bigfork, and Robert Harris of Whitefish.
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