Contributors to the rise in the price of oil:
- US dollar has fallen – US dollar strength has fallen from 113 to 84 since 2002 and is continuing to decline; US prices would need to rise 35% to offset this currency devaluation. The federal reserve has been flooding financial markets with money for years.
- Ultra-low sulfur diesel (ULSD) – As of 2006, almost all of the petroleum-based diesel fuel available in Europe and North America is ULSD.
- Tier 2 Gasoline Sulfur Control – As of 2004, sulfur content is reduced from an average of 340 ppm to 30 ppm. These standards were enacted by Bill Clinton in 1999.
- light sweet crude demand – more easily distilled into sulfur standards compliant gasoline than heavy sweet crude, which requires more extensive and costly processing.
- light sweet crude supply – production has been declining steadily, whereas more heavy sour crude is being produced.
- older refineries – older refineries need to consume light sweet crude to produce low sulfur fuels, while heavy sour crude requires more sophisticated processing. Because of the mismatch in refining capacity as compared to the mix of light sweet crude and heavy sour crude being produced, there is now a shortage of light sweet crude and a glut of heavy sour crude. In fact, Iran has 28 million barrels of excess sour parked in tankers with no place to go, and additional tankers are being added.
- regulatory hurdles – new oil refinery construction to enable heavy sour crude to be used is severely choked by government regulation. This impairs the ability for refining capacity to adapt to the supply of crude oil, and meet the demand for low sulfur fuels.
- fuel subsidies – many nations subsidize gasoline, which lowers prices to consumers and causes demand to increase.
- commodities futures – speculative investors are buying futures contracts for crude oil, increasing demand. Index fund crude oil assets have risen from $13 billion in 2003 to $260 billion through March 2008.
- political tensions – between Iranian intransigence to international pressure to stop uranium enrichment and their pursuit of nuclear weapons, Nigerian militants disrupting oil production, insurgents and al Qaeda in Iraq, and Venezuela’s crazy Hugo Chavez, there is plenty of risk priced into oil.
- strategic petroleum reserve – In 2001, GW Bush ordered the SPR to be filled to capacity at a rate of 70,000 barrels per day of increased demand. This directive filled the SPR from 545 million barrels in 2001 to its current 2008 level of 703.3 million barrels. Congress suspended this filling in May 2008.
- exploration and drilling – regulatory restrictions on exploration and drilling along most of the US coast line and ANWR impair the ability to increase supply, regardless of the availability of reserves. Despite record highs in global oil reserves discovered by exploration, this has not translated into production. State interference to discourage investment in oil production is a factor.
As you can see, the majority of causes of the stratospheric rise in energy prices is the consequence of government policies. Despite oil and gas reserves steadily increasing and out-pacing production and demand, as exploration discovers new deposits, it is the inability to bring refined heavy sour crude products to market that is continuing to put unreasonable demands on light sweet crude.
