Oil Industry News
Oct. 28, 2004 - Why Are Gas Prices So High?
Current Price of Gasoline in Central PA - $1.97 per gallon
Gas prices have been on a steady incline for the last few months. Actually, the last two - three years. So what is happening to cause this? There is not a single answer to this question as it is a complex issue.
High Demand, Low Supply
We've all heard about the laws of supply and demand, right? This law is no different in the petroleum industry. Whenever demand is up and supply is low, prices go up.
Why is demand so high? One of the reasons is that formerly repressed countries are starting to modernize. Their citizens are starting to enjoy a higher standard of living. For example, China is one of the most populous countries in the world. After the United States, they consume the most energy of any country. In recent years, China has either partially-privatized or totally privatized formerly state-controlled firms. China has also been encouraging foreign investment. This, combined with their entrance into the WTO (World Trade Organization) has increased China's consumption of petroleum. In fact in 2003, China surpassed Japan in consumption. See this article for more information.
Why is supply so low? Recently the U.S. has had a rash of hurricanes and flooding in the south. There are a lot of refineries in the southern states as well as off-shore in the Gulf of Mexico. These have had to go off-line. They are just getting back up to full production. Also, there have been no new refineries built in the last 10 years.
Normally, OPEC would pick up the slack. But OPEC is already at almost 100% capacity. OPEC and non-OPEC countries are producing between 26-28 million barrels per day. There are about 42 gallons in one barrell. This production level is up from 24-25 million per day just a few short years ago.
What all this means is that any disruption in the production lines means that no other refineries can be brought online. Since they are all operating at near 100% capacity, that means they can't supply any more. Hence, low supply.
What is the Solution?
If there were a shortage of hamburgers, then the answer is quite simple: make more cows. More cows means more supply, more supply means lower prices. Unfortunately, the answer is not so simple for petroleum.
Our environmental laws have made it very expensive to build a new oil refinery. Couple that with the fact that no one wants a refinery in their town or their county or their state. Everyone wants oil, but no one wants the means of production in their backyard. And forget about ANWaR (Alaskan National Wildlife Refuge). While opening that up would not necessarily be a bad thing, it is just a drop in the bucket.
Whoever becomes the next President, they will need to seriously consider a comprehensive update to U.S.energy policy. Will this happen? Only time will tell.