Rising Gasoline Prices

Gasoline Prices are rising and consumers are feeling the pinch. Why is this happening, what can we do?

Why?--You have to start with the basics of Supply and Demand. Let's take Demand first. The main cost of a gallon of gas comes from the basic ingredient--oil. Oil is refined into various products including basic ingredients for making plastics, kerosene, jet fuel, various other oil products and yes, gasoline. Who is using all these oil based products?  Why is Demand going up? Answer: a strong American economy means increased energy use across the board--more driving, etc. China and India are growing economies too, more cars, more plastic in Chinese toys, more construction projects, etc. This international demand previously had no noticeable impact, Now, we are (and our dollars are) competing with other countries across the globe for a limited supply. Supply: There is oil out there, but the easy light sweet crude close to the surface is limited. It costs more to extract oil offshore or oil deep in the earth. It also costs more to refine poorer quality crude. Discoveries of new sources continue, such as in the finding of large deposits off the coast of Brazil. In the USA and Canada, there are very large deposits of oil shale, which again would take a good deal effort and cost to extract. Access to Alaska and offshore sources of oil is limited due to environmental concerns and restrictions. Even if sources were legally accessible, costs of removal are high. Internationally, political turmoil in oil producing countries, (Venezuela, Nigeria, the Middle East), etc. cause occasional disruptions and uncertainty in the market. Refining capacity can be a limiting factor as far as far as products such as gasoline. Our capacity is very limited and no new refinery has been built in a very long time. That brings me to another reason--Speculation. Money is looking for commodities, which are viewed currently as being a safer bet for investment than stocks or the American Dollar. Speculators see rising oil prices, so futures markets bid up the commodity. All this is also related to the international Value of the Dollar. The dollar as valued against the Euro and British Pound is going down. It takes more dollars to buy a gallon of oil-- a gallon of gas.

What can we do about it? In the short run, not much. Conservation is the only short term measure. Drive less, drive slower, drive smaller. Even with that, international demand will still have an overwhelming effect on prices. Larger issues need to be addressed before deeper longer term solutions can have an effect. Increase in Supply is the next step. Increased reasonable access to American oil sources is necessary. Increased sophistication in extraction technologies will ameliorate the environmental impact. Increased Refining capacity will be necessary. Alternative sources of energy: Well, this can be a complicated topic. Basically, alternatives replace the demand for for oil and gasoline. Rising prices are making these non crude derived sources economically viable. Potential energy sources include extraction of oil from oil shale, conversion of coal to gasoline, and gas to liquid projects using techniques such as the Fischer-Tropsch Process currently used by the US AirForce to produce jet fuel. Ethanol can be derived from corn or other agricultural sources. While this may be a viable option in the Midwest, increasing demand on corn (food) will raise food prices. Non hydrocarbon sources: Solar-particularly in the Southwest, Wind, Hydroelectric, Geothermal, and Tidal power. Nuclear Power can have a major impact on our energy needs and must be encouraged as part of an overall energy policy. Finally, Future technology like converting cars to run on fuel cells powered by Hydrogen.  What about electric cars? Again, the electricity has to come from somewhere.  We need all of these solutions.  Limiting ourselves to only one way of approaching the problem, will not be enough.

Why do it? In some of these alternatives, the energy it takes to make (say Hydrogen) is more than the energy produced by the product.  Bad idea? Not really.  The net effect is to reduce dependence on foreign oil.  Viable alternatives to oil will stabilize the cost of fuel and energy. Finally, any kind of energy source that enables America to become less dependant on foreign sources will create stability and security for this country.

Wall Street Journal Reference

McCain's Energy Porposal