Why the Hike in Gas Prices?


Why the Hike in Gas Prices?

Crude oil prices are at record highs. What’s behind the hike, how high will it go, and what are the larger repercussions?

On June 27, crude oil prices on the New York Mercantile Exchange closed above $60 a barrel for the first time ever. American consumers are worried that gas prices will continue to climb, and many businesses are likewise concerned. After all, the price of oil has shot up about 60 percent in the past year. Where will it go from here?

The Trumpet’s article “Black Gold” describes the supply-and-demand dynamics of global oil consumption and, more importantly, what to expect in the near future, and why.

As usual, the experts disagree. Some predict prices will drop. They believe that the sizzling Chinese economy is due to cool, leading to a reduced demand for energy. They also claim that more oil could be extracted from various sites in Iraq, Africa and elsewhere, thus increasing the supply. Furthermore, the massive oil-rich tar sands of Canada have not been developed because it’s been too expensive to extract the oil from the sand. With record high prices, that alternative, they say, is no longer cost-prohibitive.

On the other side, experts don’t see a practical solution in the offing. The world consumes roughly 83 million barrels of oil every day, compared to 77 million barrels consumed in 2001—an increase of 6 million barrels a day in just four years. Spare production capacity, which averaged about 5 million barrels a day over the past 10 years, has plummeted to a mere 1.5 million barrels a day. The gap between supply and demand is closing rapidly—too fast for potential development to stem the rise of prices.

Even if the oil supply could keep up with growing demand, bottlenecks in the supply chain would have to be overcome. Refining capacity (especially for heavy crude) is largely maxed out, and supertanker transports are limited.

Moreover, there’s an acute shortage of the engineers and professionals needed to develop additional oil projects. For example, when the American Petroleum Institute surveyed 17 percent of the oil industry, those companies alone said they needed more than 5,000 engineers in the next five years. In 2003, only about 1,500 students were enrolled in U.S. petroleum engineering programs.

Besides the lack of professional talent, aging equipment needing to be replaced also contributes to rising prices. And not just in the United States. The Saudi oil minister recently disclosed that “energy-project costs had risen as much as 60 percent due to a shortage of engineering talent, equipment and raw materials” (post-gazette.com,June 28). In the U.S., the cost of drilling an onshore oil well has skyrocketed from $800,000 to $1,500,000 in just 15 months—costs that are passed on to you at the pump.

Beyond these concerns, there is reason to suspect that the world’s top oil producer, Saudi Arabia, does not have the reserves it claims to. “Almost 90 percent of Saudi production comes from six giant fields, all of them discovered before 1967. … The six major fields, having all produced at or near capacity for almost 40 years, are showing signs of age. All require extensive water injection to maintain their current flow” (Wall Street Journal, June 28).

Finally, another factor that affects the price of oil is overlooked by some analysts today. Due to the ever-tightening gap between supply and demand, there’s an added premium that rises and falls according to the perceived threat of terrorist activities, the intensity of supply disruptions, or other kinds of instability arising in oil-exporting nations. Our two articles “Black Gold” and “The Vital Sea Gates examine the geopolitical ramifications tied to the world’s number-one commodity in light of Bible prophecy.

Read these articles and you will understand why, when oil was fluctuating between $40 and $45 a barrel, we were confident that $70 a barrel was “a reasonable expectation of what to expect in the foreseeable future” (“Black Gold,” Sept/Oct 2004). We still are. Gas prices will continue to rise over the long haul, and that will play a role, unfortunately, in the decline of the U.S. economy.