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Wednesday, April 26, 2006

$4 Gasoline

Ok, first of all, having lived over here for several years and having paid roughly $3 to 4 per gallon of gas for some time, I must admit I am tired of hearing Americans complaining about paying $3 per gallon for their gas. Maybe I watch too much Fox News.

Let's ignore the argument of the political left that the Iraq war was about enriching Bush and Cheney's friends at Halliburton and the oil companies, but let's accept the argument that Iraq is about building peace and stability in a region of the world that contributes significantly to the production of petroleum, and that peace and stability is intended to underpin the free flow of petroleum at market prices. These are valid strategic policy considerations that might justify Mr. Bush engaging in nationbuilding there despite his earlier promise to not be a nationbuilder.

But at what cost? The total US consumption of oil is roughly 22 million barrels per day (by the way, only roughly 20% of US oil imports come from the region, 4% from Iraq alone). Assuming you get roughly 19.5 gallons of gas from a barrel of oil, you get a rough consumption level of 156.6 Billion gallons of gas per year. The US is projecting the 2006 costs of the war in Iraq to run roughly $94 billion. Divide that into the total gallons of consumption, and the war in Iraq has added roughly $0.60 per gallon to the cost of gas (if you looked only at gas attributable to middle-east production, multiply by 5).

If you take as a given that the operating overhead of collecting your taxes adds another 40 cents per gallon, people in the US are already paying $4 per gallon.

My first question is, "Wouldn't it be more productive/cost-effective to open new sources, such as drilling in Alaska and the Caribbean?" Why is Cuba drilling new wells off the coast of Florida while the US are not?

Next, Bush is under increasing pressure to impose price controls of some sort. That is sort of like King Canut commanding the sea to be still, and to his credit, Bush was calm enough yesterday to suggest it was not a workable solution ... of course, the fact that he felt pressured to speak at all yesterday is a sign of how politically weak the Republican position is becoming.

But what the politicians can control immediately is their own take at the pump. Roughly 46 cents of the cost of every gallon goes to Federal and State taxes on gas. Yes, this dubiously pays for roads, etc. By the way, the inflation adjusted cost of gas in 1981 was also roughly $3 per gallon, and the taxes then were only 31 cents per gallon. One can strongly make the argument that government greed is also a part of the problem.

Finally, as noted here about a month ago, the dollar is in decline, but the people who sell oil want/need to maintain purchasing power of the dollars they receive per barrel, so some of this upward creep reflects the declining value of the dollar, and that is a product of a declining confidence of the World Markets in the US Market even though everything in the US appears to be chugging along rather nicely. That is food for thought some other time.


Anonymous Finlander said...

Your arguments and reasoning seem to make a lot of sense but where I feel that your wagon lost one of it's wheels was when you suggested that increased drilling in Alaska and in other domestic sites would be a panacea.

Increased demand on the global energy supplies by India and China alone dictates a vastly different strategy in order to be of any real help. The most obvious strategy would be in lowering the U.S. domestic energy consumption which, it's nearly 25% of the global total, is unmanageable and totally ridiculous. Since the American gasoline prices are the envy of the other Western industrialized countries, the major problem can not be the price but something deeper.

In my mind, the major problem is the attitude of Americans whom for the past 100 or so years have convinced themselves that the cheap gas is their god given right. This attitude - our way of life - has impeded on any serious alternatives to emerge.

The consequences are now being felt by the consumers but it's effects are graphically shown by the, once mighty, auto industry that is at a near collapse with products that are not able to reflect the new realities. The once blessed cheap oil, which can't be sustained any more, have suffocated innovation and it has also blinded the American citizens as well as their political movers and shakers.

However, I am counting on that finally the political leaders in the U.S. start acting in the best long term interest of the country. I sincerely hope that they will not just concentrate on getting re-elected by promises that the same old and mythical American way of life can go on ( and the drilling ), but that they have balls enough to tell people that the party is coming to an end.

10:48 PM, April 26, 2006  
Blogger Mike B said...

Thanks for the compliment, but I tend to take another view:

Alaska, etc. not a panacea, but they are valid alternatives to the ME sources. As far as I care, the ME can send all of its oil to China & India, which by the way now consume as much oil as the US and are on their way to consuming far more.

Conservation is not the answer. In fact, the answer is for the US to consume even more oil. Only when the stuff becomes really scarce and the price becomes very high will the move to real energy alternatives start to take place.

It wasn't expensive gas that crippled the auto industry; it was big labor.

As for the politicians, they have always been what they are (Rome -- Bread & Circuses). Of course they will pander to the people. I would be disappointed if they did anything less.

12:37 PM, April 27, 2006  

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