Bogus Oil Inquisition
The Ignorance About Oil
By Daniel Muniz

Nothing could be more ridiculous than senators with a bogus sense of righteous indignation condemning oil executives in two U.S. Senate committees about high gasoline prices. In fact, many politicians relished the opportunity to look and sound tough on television.

But what did it really accomplished?

Other than the tough talk, the Senate committees accomplished absolutely nothing except for demonstrating the incredible ignorance of our elected officials trying to sound exasperated in front of uninformed constituents. The oil executives don’t work for Congress or for the government and the government is not about to nationalize the oil industry.

Higher taxes are possible but unlikely in the current environment because they would kill off the incentive for the industry to invest their profits into finding new oil and expanding refining capacity. Unfortunately, the best that some unscrupulous senators are hoping for is to catch the oil executives in some inconsistent statements and then try to portray them as liars. And if the executives continue to testify enough times, then it probably wouldn’t be too hard to do.

But why are gasoline prices so high especially after natural disasters such as hurricane Katrina?

Even though the oil executives already explained simple economics to our elected officials, below is a definition of the Law of Supply and Demand:

Our U.S. senators either are ignorant of basic economics or they have a flair for theatrics.

Unfortunately, consumers are also part of this ignorance equation.

There are plenty of people who see the high gas prices at gas stations and just mutter “Thanks Bush” thinking that the president is part of some sort of conspiracy. And you only have to take a glance at the news wires to see the wild accusations people have about greedy oil companies.

Part of the problem is that many people have this naïve assumption that the oil buried in the ground or beneath our oceans is reserved solely for Americans. Quite a number of individuals as well as the media simply refuse to fathom that other people across the world want the same oil too. Oil is a commodity that has a huge global demand, yet the magnitude of this demand does not seem to sink in with the press in particular and with the public in general.

When the demand of a product increases but its supply remains static, prices are going to rise. Some oil producers are increasing output but it is not matching the enormity of the growing demand. Many Americans were caught off guard when gasoline prices more than doubled. And for people, who only rely on the media for their information, they simply misunderstood what was happening across the world and blamed anyone connected with oil for these high prices. And that blame went to President Bush and Vice-President Cheney as well as to the entire oil industry.

But what really happened?

According to the July 2005 statistics, China and India each have populations of over a billion people. Both countries, especially China, have burgeoning economies with lots of growth in manufacturing. But just how big is one billion people?

The population of the country of Sweden is nine million people. New York City has 8.5 million residents although its entire metropolitan area is far greater than all the people in Sweden. The United States has a population of 295 million while China as 1 billion and 301 million people.

If you took away exactly one billion people from China, its population would still be larger than that of the United States.

Suppose just one percent of the population of either China or India obtained additional automobiles. Then imagine it happening with both counties simultaneously. Such an increase is actually quite modest but it is staggering as in the increase in consumption of gasoline for cars. Then try adding in infrastructure like factories, modernization of cities, etc.

But what about other developing nations with large populations with growing economies who are also thirsty for oil?

Below is a population table of the largest 30 countries based on July 2005 estimates:

Source: CIA Factbook

The reason I chose to display the top 30 countries instead of the top ten is because I wanted to show that Vietnam’s population is actually larger than that of the Germany, France, and the United Kingdom. In addition, there are plenty of other countries with large populations who are on the verge of getting connected to the electrical grid or obtaining automobiles or both.

However, this enormous increase in consumption in these growing economies is something you really don’t see being explained by the press in very much detail. But that is just demand. Supply is a different story in itself.

Again, people have a naïve assumption that the oil in the ground is the same oil found in West Texas as it is in Angola or the North Sea or in Saudi Arabia.

Imagine a bartender making a margarita. There isn’t just one brand of tequila he can use to create this drink. In fact, there are hundreds of brands that differ in quality, taste, and in price. Some are cheap and some are expensive.

Oil is the same way.

Most refiners prefer the expensive oil known as light sweet crude, which is what we commonly see in the news in relation to the price of a barrel. This type of oil is easy to process, has a low sulfur content, and yields the highest volume of the kinds of fuels that we consume. And because of our stringent environmental laws for cleaner burning fuels, this type of oil is a natural fit.

And just like there is cheap liquor, there is cheap oil. The heavy sour crude along with other medium types of oil are actually quite abundant but the problem is that not all refineries have the equipment to process them. When oil was cheap, there wasn’t much of a need to invest in such expensive equipment to process heavy sour crude. As a result, not many refineries have the capability to process the cheaper lower grades of oil.

But now with the soaring demand of oil, this heavy crude is now a hot commodity. The San Antonio-based Valero Energy Corp., which is the nation's largest independent refiner has now become the leading processor of sour crude. And for this foresight, Valero is reaping huge rewards for their investments since this type of oil is so much cheaper than light sweet crude.

And unlike a mixed drink, refined gasoline is exactly the same regardless where it comes from or if it came from light sweet crude or from heavy sour crude.

Another factor to the “supply” side of the equation is that not all the places where oil is found happen to be stable peaceful countries. Oil producing countries like Venezuela, Angola, or Nigeria has a lot of political and domestic instability and it is quite common to have disruptions in the oil supply chain.

Tragically, many of these oil-producing countries should already be wealthy but corruption and mismanagement has ruined whatever chances they had to rise out of poverty. Mexico had its chance but now its vast reserves are slowly being depleted without much to show for it. For democratic countries, Norway is about the only one whose population has benefited from wise decisions.

And finally, all the supply in the world still won’t help if we do not increase our capacity to refine oil into gasoline and other fuels. This country hasn’t had a new refinery built in almost 30 years and with endless lawsuits and governmental red tape, it is next to impossible for news ones to be built.

But what will Congress really do?

Will it allow for more oil exploration?

Will it help refineries build more refineries across the countries instead of having most of them centered in hurricane prone areas?

So far all Congress has done is go on television and vent out some bogus anger. If that is all that is going to happen, then another drastic price hike will happen again in our future.

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