SavingFreakonomics — Why Oil is So High
With the economy slowing I have fielded more questions from friends and readers about why some of this happens. Since this topic tends to get political in nature I won’t be making this a weekly part of my blog but will visit the subject from time to time as we watch what the U.S economy is doing.
Oil prices hit another high yesterday and forecasters expect it to continue to climb. Why is oil going up in price so quickly? There are three reasons and two of them are caused by government.
The non-government caused reason is that India and China are starting to become prosperous. A middle class is developing in these huge countries and they are starting to buy vehicles. Why live in a smog infested city when you can live just outside of it and commute. This is putting a strain on oil markets every where. Increased demand and steady supply equals a rise in prices. Our government could have This leads to the second reason for an increase in prices. No new drilling in the U.S.
We have tons of oil in Alaska and off of the coasts of our country. Oil we can extract safely with little to no fear of spills. In fact we have had no spills from oil platforms even though giant hurricanes went through that region. This problem is all caused by government. The government has decided not to drill in these areas for various political reasons. No one can come to a compromise so nothing is getting done. When drilling in Alaska first came up one of the arguments against it was it will take six years for any oil to flow. It is now seven years later and I wish the oil were flowing. If we drill in Alaska we will have opened up a huge oil reserve that would allow us cheaper oil in the short term while we explore other forms of energy for the long term. I think one of this elections campaign slogans should be, “Let it flow for now, so we can find a way how!” Speaking of other forms of energy…
We don’t use other forms of energy that are available. We could be building nuclear power plants but we haven’t built one since the 70’s. France gets most if its energy from nuclear and they have developed a process to reuse the worn out nuclear fuel. This just makes sense instead of getting so much of our electricity from oil. The other form of energy we never talk about is natural gas. We have all the technology we need to make natural gas vehicles and yet they are hardly used. The U.S. produces roughly 95% of the natural gas we use. This would be a great way to reduce dependence on oil from the middle east. In fact natural gas is so plentiful, when we are drilling for oil, it comes up with the oil. What do we do with it? We burn it off. Thats why you frequently see a fire burning at the top of oil wells.
In economics there are two ways to reduce prices, increase supply or lower demand. We are doing neither, and thus, the price of oil has soared 400% in the last 10 years. A curse be on both the democrats and republicans for doing nothing to encourage oil exploration and viable alternative fuels (Ethanol is not a viable fuel!) in that time frame.
So how can we absorb some of this. I would suggest getting a compressed natural gas (CNG) vehicle for your next car. There are a lot of them out there you just have to look. You can get an equvalent amount of natural gas for more than a dollar less than gasoline. Honda makes a CNG civic called the GX. You can also buy these cars used. The easiest place is ebaymotors.com. Their search feature makes it really easy. If the vehicle is listed as Bi-fuel it means that it can run on both gasoline and CNG. This means if you run out of CNG it just switches over to gasoline. These vehicles also burn very cleanly so the engines can last as much as 500,000 miles and the oil only needs to be changed about every 7,000 miles. Did I mention you get a tax rebate for buying one of these? What’s not to like?
March 4th, 2008 at 11:38 am
Isn’t there an environmental reason for not drilling in Alaska, or is that just a smokescreen for other issues?
March 4th, 2008 at 1:01 pm
I didn’t want to put the political side in the main post. The environmental argument has to deal solely with hurting the Caribou. The argument is weak at best. Studies have actually shown that the caribou like the oil pipelines because you have to keep the oil a certain temperature in order for it to flow through the pipes. What do you get when you have a bunch of warm caribou in one place? More caribou!! Anyway, the area that the oil companies have targeted as prime area to drill is deserted and in the middle of nowhere. It is also just a small part of the ANWR area.
March 4th, 2008 at 2:41 pm
No new drilling in the U.S.
Well, that’s not entirely true. It’s just that the most productive areas are either off-limits or extremely limited to drilling. I frac’ed an oil well a couple of months ago that came on making 1500 bbls of oil a day. It’s just that in a year and a half in the field (working for an oilfield services company), I’ve worked on maybe a half dozen oil wells. Hundreds of gas wells.
The thing about drilling though, is that as drilling goes up, the price of drilling goes up (again, the supply and demand thing). Rig prices rise and fall with the wind. And it’s expensive to drill and complete a new well. Most of the jobs we do range in price from $150,000 to $2,000,000 for one to four days of work on a single well.
March 4th, 2008 at 3:12 pm
Ok I have to admit that NO new drilling was a bit of an exaggeration. We are doing very little new drilling and even less exploration within our borders. We are the only country in the world that does not take full advantage of its own natural resources. I don’t think I could see the Chinese holding back on oil production for any reason.
March 6th, 2008 at 8:36 pm
The point is that the only way we are going to have prices go down, is for “us” to cut down on the use of oil. Supply vs Demand is the key here. Until everyone wises up and conserves on gas and oil, they will continue to jack up the prices. Why? Because they can…
March 6th, 2008 at 9:51 pm
I believe the larger problem is production. The world has more oil reserves now than it did 30 years ago. The world also consumes more than it did 30 years ago, but we haven’t built a gasoline refinery in the US in 30 years. The other problem with gasoline is that each individual state has its own regulation on the mix that makes up the gasoline. This has left the US with more than 40 mixes of gasoline. So if California is running low on gas they cannot get it from Nevada and keep the prices low. Gasoline could be considered a part of interstate commerce and be regulated by the federal government. If that were to happen all the refineries we have would be able to produce at a more efficient rate due to stream lining and competition.