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Oil stuff (volume 2)


xBy John Cannell

The response to my article in the last issue was surprising and most welcome. It seems that Big Oil and affiliated Big Numbers stirs a major response in all of us, which is not surprising, when you consider we all make our living directly, or indirectly from the automotive field. So, here we go, one more Oil article!

Some facts:
The world runs on 106 million barrels of crude oil a day

  • .ie.38.6 billion barrels a year
  • The USA uses 25% of this but is virtually tapped out for liquid crude reserves.
  • We are not really facing a fossil fuel shortage! What? That’s right. Read on . . .

Opec and the big oil companies habitually under-estimate fuel reserves. For example, in 1995, British Petroleum estimated that 50% of the North Sea field had been extracted. Here it is ten years later, and they still estimate that 50% of the exploitable reserves remain. Duhhh . . .

In 1970 according to the U.S. Department of Energy, world reserves were adequate for 32.2 years, which means we ran out of oil in March 2002. Ahem. Current known reserves are approximately a trillion barrels, not including potential from oil shale, coal, ethanol, etc. Where did this come from?

Utah, Wyoming and Colorado have proven potential of 2 trillion barrels available from oil shale, while Canada has around 4 trillion barrels. Russia also possesses large oil shale reserves. This vast resource is seldom included in world reserve estimates, but, even with existing technology it is recoverable at $40.00 (US) a barrel.

Why, you ask, would oil companies advise they are running low on oil? Why not? All of us advertise we only have limited vehicles, tires, tire changers, etc. in stock, so buy now while supplies last and prices increase. Why would oil companies differ?

But there’s more…
Most people-on-the-street suspect gas prices fluctuate entirely at the whim of the major refiners who scheme to pick our pockets. True? Not really!

Although it may seem suspicious when prices move up and down in almost uniform synchronicity between refiners, wholesalers and service stations, they really have only minimal influence on day-to-day pricing. In reality the prices are far more controlled by supply and demand, particularly demand.

Gasoline demand is largely price independent, because the buying habits of consumers do not change in proportion to major changes in price. Gasoline has few very close substitutes, so with few alternatives, consumers are less price sensitive. Where else is there to go? However, since they tend to categorize it as a “necessity’, most are willing to devote more of their income to its purchase, but make an effort to reduce consumption.

In the light of sudden increases, it is not feasible for most consumers to greatly adjust their lifestyles and fuel consumption. Prices tend to lower before individual action is taken, although prices seldom return to the previous level.

Is there a definite connection between the world price of crude oil and the price of gasoline? Obviously, there is, but we should remember that crude comprises only 56% of the cost of a gallon of gasoline of gasoline in the U.S. according to the U.S. Department of Energy (even less in Canada!). Other statistics from this same department show an increase in the cost per barrel from $28.00 in 2000 to $69.00 in 2005, an average annual increase of 20%.

In the same period, the retail price of a gallon of gasoline, in the U.S. increased by only 12%, so, one can see, the price connection is not a direct one. There are more factors at work.

Some people say that during or following natural disasters, or other emergencies, the gasoline marketing system falls apart, and the government should intervene with price controls. This makes no sense.

Under these circumstances the supply and demand system works the way it should. Unfortunately, media intervention, subsequent panic buying and reluctance of some outlets to follow the pricing programs, result in shortages, and cries of “Gouging”. In fact it was precisely this artificially introduced panic which stranded so many on the Texas freeway.

Another misconception. Why do they jump the price of gas they already have in the ground or in the tanks? The retail price of gasoline is not predicated on the wholesale price at the time of purchase, but on the expected replacement cost, after current demand is factored in.

The oil companies, know that storms or disasters can and will damage or destroy oil rigs, refineries, and pipelines, and that a price increase, even only short term, will be inevitable. They expect the retailers to pass this on, which, of course, for the most part, they do.

Probably, none of the foregoing brings joy to your hearts, however, it may be of some comfort to know how the “system” works. Lower gas prices? Again, supply and demand will tend to drive the prices down, but, probably not to the levels enjoyed a year or more ago.

Many people will car pool, cancel Sunday drives, drive slower, buy smaller vehicles, turn their thermostats down, etc. etc. and this will reflect in reduced consumption, more competition among the oil giants, and perhaps short-term lowered prices.

We just purchased a new service vehicle for one of our technicians. We purchased a well equipped station wagon with a 4 cylinder engine, hoping to cut fuel expenses by up to 50%. If this works well, some of the other techs may expect similar vehicles. Many others we talk to plan similar action. Guess we are all in the same boat!

Editor’s Note: We consider John Cannell to be a very experienced and uniquely talented pioneer in the automotive field, and value his opinions and the wealth of personal knowledge he brings to the pages of Auto Atlantic. Some readers may find however, that some of the opinions expressed in this article may not necessarily represent their own or those of the editor