New Castle News

March 12, 2012

Mitchel Olszak: Separating fact from fiction in oil prices

Mitchel Olszak
New Castle News

NEW CASTLE — If you think gasoline is expensive today, wait until there’s a war in Iran.

With prices at the pump approaching $4 per gallon around here — and $5 in some parts of the country — the cost of filling your gas tank is again becoming more painful. It’s one of those things we see when the cost of oil jumps in the marketplace.

Current price spikes aren’t because of a booming economy or plummeting production. As we all know, the economic situation in much of the world remains sluggish, and contrary to what you may think, this is the eighth year in a row oil production has risen in the United States.

What’s really fueling fuel price hikes is speculation — mainly the possibility that war could break out in the Persian Gulf. The gulf is a choke point for a big chunk of the world’s oil supply.

Should those supplies be disrupted, there would be real shortages of petroleum on the world marketplace. Gasoline at $5 per gallon may look quaint at that point.

Every time petroleum prices rise, it leads to the inevitable round of finger pointing, hand wringing and demands for energy independence in America. Yet we — and the rest of the world — remain heavily dependent on oil from the Middle East.

Conspiracy theorists will give you lots of reasons why: Oil company conniving, environmental intransigence and assorted political manipulation.

In fact, there is a very simple reason we continue to receive Mideast oil. Most of the time, it’s dirt cheap.

The cost of pumping a barrel of oil out of the ground in the Middle East is usually less than $10 a barrel, often much less. Recovering it from deep ocean sources, such as the Gulf of Mexico, North Sea, Nigeria, etc., run from around $30 up to more than $50 per barrel.

Out in the American political arena — especially during a presidential election year — you will hear a lot of jabbering about the need to boost domestic energy production. Republican candidate Newt Gingrich, for instance, is promising $2-per-gallon gas if he’s elected.

But such nonsense ignores two facts: Domestic energy production already is rising, and America’s cheap oil is gone. Yes, there are ways to boost domestic production. But anyone who thinks this would lead to lower pump prices over the long haul is delusional.

Perhaps the brightest spot on the American energy front is in the realm of natural gas. Unlike oil, natural gas prices have seen a long decline in the marketplace, thanks largely to shale gas discoveries and the technology to exploit them.

Natural gas prices have dropped so much, in fact, that drillers are starting to scale back their operations. The cost of deep drilling is high, and if the marketplace won’t support the investment, the incentive to retrieve this energy simply isn’t there.

One solid avenue for improving America’s energy independence is to move consumption away from oil and toward gas. Putting more natural gas-powered vehicles on the road and switching industrial plants to natural gas use will reduce demand for oil.

But rest assured that war in the Persian Gulf will raise oil prices substantially, perhaps for years to come. Those who suggest a quick military action in Iran are ignoring the lessons of Iraq and Afghanistan.

America needs to become more energy independent, but not just because of the current spikes. Doing so, however, won’t lead to ridiculously cheap prices. Instead, it will stave off disaster.

And energy independence must embrace alternate fuel sources. Not only does the tapping of fossil fuels come with assorted environmental worries, but the faster they are consumed, the faster they will run out. Innovation of all sorts must be part of America’s energy future.