I have been busy with a sick horse and various other problems. Here is an excerpt from my book:
According to the Energy Information Administration (EIA), crude oil accounts for about 73 percent of the price of gasoline, while distribution and taxes make up the remaining 27 percent. That percentage varies depending on the cost of the crude oil. Usually, distribution and taxes are stable, so that the daily fluctuations in the price of gasoline reflect the market price of oil. Occasionally, however, distribution lines are disrupted, as during hurricanes, or they are down for maintenance, which can increase the price of gasoline even when oil prices are down. This drawing from the EIA illustrates how gasoline prices break down. You might be wondering where the profit is in this picture, and my answer is that it is embedded in every component of the price except taxes. In this diagram, crude oil averaged about $68 per barrel in 2007. From 2000 to 2007 the average crude oil price was about $39 per barrel, and the crude oil cost share of the retail gasoline prices averaged 48 percent. In 2008, the price of crude oil has been significantly higher, which is why it is a larger percentage of the overall price of gasoline.
Oil or gasoline prices are the ones that we are most aware of. Our other main sources of energy in the U.S. are natural gas, electricity, and coal. They are also traded as commodities and their price trends generally track those of oil. In a perfect world, one form of energy would substitute for another, making us indifferent to which one we use. But that is not currently the case. Almost 50 percent of our electricity is generated from coal, another 40 percent from natural gas and nuclear, and the remaining 10 percent from various smaller sources. At times, the prices of these commodities can fluctuate pretty widely; but as consumers we are less aware of the fluctuations unless we buy fuel oil or propane. Because electricity at the consumer level, for many of us, is regulated, the utilities must work through state regulatory commissions to increase prices, so the prices tend to change more gradually and less visibly. And like gasoline, only a portion of the price we pay for electricity is for the energy component. Its retail price also includes transmission, distribution, and other charges.
There is a lot of talk that speculation is what drives the price of our energy, particularly gasoline. Proving or disproving that argument is probably beyond my intellectual capabilities—and of the people who are arguing it—and, I think, is mostly a smokescreen to divert us from the real issue we have with energy. That said, I believe that speculation and chicanery must impact the price of our energy. My opinion is based on the events that took place in the California and western U.S. electricity markets in 2000 and 2001. Due to poor market design for the recently deregulated energy markets, Enron and other energy traders manipulated the electricity and natural gas markets, throwing them into disarray, driving the price of both commodities to unheard of levels, bankrupting the state’s largest utilities, and bringing undue economic hardship to the people in that state. The truth is that, while energy trading may help facilitate pricing in the energy markets, the people who are doing the trading are not doing it for noble purposes. They are doing it to make money.
Certainly speculation should not be permitted to drive up our energy prices and our regulators should take steps to prevent this. However, the most important step for us to take as a country, and for each of us as consumers, is to consider our energy supply and demand situation. Unfortunately, it seems as though we put most of our emphasis on the supply side of the equation and not the demand side. We worry about where the next barrel of oil is coming from, where the next power plant will be built, or when the next alternative energy fad will emerge. But each of those choices leaves us yet again beholden to the energy markets.
While worrying about our own energy needs, we should not forget that there are many growing economies in the world that are also worrying about their needs and competing with us for resources. China and India, two world giants with a combined population of nearly 2.4 billion people, began growing rapidly in the 1990s. With their economic growth came new energy demand. Global oil consumption rose from 82.6 million barrels a day in 2004 to 85.6 million in 2007. Since the beginning of the oil era, energy prices have been dictated by the U.S. economy’s ups and downs. But now the markets are responding to global demand. With consumption on the rise, suppliers are reaching their productive capacity. OPEC, which produces more than a third of the world’s oil, has maintained excess capacity of only 1 million to 2 million barrels a day since 2004, down from 4 million in 2001 and 5.6 million in 2002. New supplies haven’t developed quickly enough to keep up with this growth in world demand, not only because it takes time to bring those new reserves on line but also because oil resources are concentrated in countries with state-run oil companies or little economic freedom.
If we as consumers continue simply to adjust our spending to maintain consumption as prices rise, economic theory suggests that eventually more supply will be created and prices should go back down. But we don’t really know how long it will take for those supplies to develop or what the cost of waiting will be to us. A more reasonable approach is to manage our demand for energy more efficiently. For one thing, we will feel better. Managing energy unwisely and using it inefficiently leaves us feeling beholden to the bad guy of the day whether that is OPEC or energy traders and hedge funds or the local gas station owner, power company, or oil company. Managing demand is probably our biggest, most powerful and durable strategic weapon to reduce our energy risk exposure; yet we and our country’s leaders often give it short shrift. While this book could explore why that is the case, it will instead focus on how we use energy and where our energy efforts could be applied more effectively to reduce our energy costs and dependence.
It’s easy. If we don’t want to pay high prices, we should have a big supply and lots of inventory. That would make it possible for us consumers to be able to budget our energy needs relatively predictably every month. But, that isn’t the case. Whenever a tropical storm or hurricane hits the Gulf of Mexico, prices go up; or when Iran or Israel start rumbling with the threat of war, prices go up. Prices are down today because the world is in the midst of a deep recession and thus demand is down. It’s good for oil prices but bad for everything else.
To me, these are all signs that our collective gas tanks are running on empty. I am not the only one who believes this. Many experts in oil supply believe that the world is close to reaching the peak of its ability to produce oil. They call this theory “peaking oil.”
The argument behind peaking oil is simple. As demand for oil continues to increase, there will come a point at which the world’s conventional oil supply will no longer be able to meet it. That is the point at which conventional oil supply will have peaked and start to decline. Peak oil is not the end, nor even the beginning of the end, of the Oil Age. At the peak, the world will have more oil available than it has ever had before. No one knows how rapidly oil production rates will fall once they have peaked. They could plateau for many years and the decline in global production could be less dramatic than the rise. But eventually oil production will fall. A 2 percent annual reduction in global oil supply would be equivalent to losing the energy provided by eighty nuclear power plants a year. That is a lot of energy and will beset us and future generations with enormous challenges to try to replace it.
