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Most Important Factors in Crude Oil and Gasoline Price Formation

Oil is one of the most important commodities in the contemporary world. Crude oil and gasoline price increase leads to global price growth, so oil price fluctuation can be considered as important for Earth factor. The purpose of this research is to investigate the most important factors in crude oil and gasoline price formation. Among these factors it would be necessary to mention growing demands in oil, limited oil production in some important regions, absence of alternative fuel, limits in natural gas, coal and nuclear power use, political instability in oil producing regions, federal and state taxes, and, at last, the influence of oil producing organizations.

This research thesis statement would be the following: gas prices fluctuate due to consumer demand, geopolitical events and oil companies’ policy.

The USA is one of the biggest oil importers in the world. According to International Energy agency data: “the top five exporting countries accounted for 70 percent of the United States crude oil imports in January while the top ten sources accounted for approximately 89 percent of all the U.S. crude oil imports.”(EIA, www.eia.doe.gov) Approximately 40% of the US energy needs are covered with home production. Major oil producing regions in the USA are Alaska, California, and Texas. Some of US-produced oil is exported in other countries, for example, Japan, and some part of American oil is used in chemical industry. The rest 60% crude oil and gasoline demands in the United States are covered with imported oil. Thus, oil price in the United States is formed by home producers and importers.

However, the crude oil and gasoline price have the intermediate regulative factor: the refinery cost. Phelps claims in his research that: “The petroleum industry in the United States is characterized by considerable vertical integration, ranging from crude oil exploration and extraction, through refining and distribution, to final product sales at retail service stations (289). Refining sector also plays the significant role in price controls. The problem is that the refining facilities in the USA cannot satisfy the US demand on gasoline. Besides, state regulations prevent the development of new refining facilities. In theory the problem dealing with high crude oil and gasoline price in the USA could be solved by drilling increase and regulations removal; together with alternative energy sources used they can make an effective and working solution. But this is in theory only. In practice drilling can hardly be increased. Offshore drilling is limited by environmental concerns, especially after Mexican Gulf oil spill in 2008. “The Obama administration, reacting to environmentalist pressure, has declared a moratorium on new offshore deepwater drilling pending the outcome of an investigation into the causes of the Deepwater Horizon spill. Many environmentalists wish to go much further; the Sierra Club proposes phasing out all offshore exploration and production permanently (Green, Hayward, 2).” The same environmental concerns prevent drilling increase in the North America; besides, drilling in this region is more complex because of cold climate.
Latest news tells that in 2010-2011 BOEMRE (Bureau of Ocean Energy Management, Regulation and Enforcement) issues three permissions for drilling in deep water of Mexican Gulf. (IER, www.institueforenergyreseaarch.com). However, president Obama has demonstrated that the Brazilian companies are favorable. His recent visit to Brazil and some new agreements with Brazilian companies make analysts suppose that under Obama administration in the US is more oriented on imported oil. (Pye, www.netboots.media.com) This led to gasoline price skyrocketing and jobs loss in the USA.

Thus, inner politics of the US administration has high impact on oil and gasoline price win the country.
Nuclear power use could hardly be considered as an absolute alternative to oil because of environmental concerns, high nuclear energy plants’ cost, and growing prices on uranium. Nowadays there are approximately 100 nuclear plants in the USA produce 20% of its energy. Though nuclear plants have some benefits, there are two main problems related to nuclear power plants: disposal of nuclear waste and accidents. Recent disasters in Japan, in particular the accident on nuclear power plant in Fucushima prefecture after the earthquake and tsunami, increased the concerns related to nuclear power use.

Coal and natural gas could not replace oil because of several reasons: coal and gas are also non-renewable source, the coal mining and gas production is not cheaper than oil production, both coal and gas cannot be used as automobile fuel, and so on. Besides, coal and natural gas plants are covered with numerous strict environmental regulations. Emissions of nytrogen oxides and radionuclide are strictly controlled. “Both coal and natural gas plants are covered by emissions controls on nitrogen oxides” (IEA, 179). Besides, “nuclear power plants are restricted in their emissions of radionuclide and may be subject to additionally service regulations.” (IEA, 179) Generally, the balance of cost and benefits for nuclear power, gas and coal cannot be achieved because all these kinds of energy suppliers demand the infrastructure development.

Thus, because of limited natural sources, strict regulation and high operational costs nowadays there is no reasonable alternative to oil in energy production, and this is one more factor influencing on oil and gas price.

Political volatility in oil producing countries could be referred to as the factor increasing the oil price. Political stability is the important factor for business development in every country. The political stability allows attracting the direct foreign investments, which positively influence on the business in the country. The instability of political situation prevents the flow of direct foreign investments in the economics of the country due to higher risks. Recent civil unrest in oil-producing Venezuela, or the latest events in the Arabian countries, also contributed to global oil price growth. So-called “Arabian spring” involves some oil-producing countries, for example, Libya, and some other important countries. Thus, Egypt doesn’t produce oil, but this country controls oil supplies from Middle East by sea. In this way political instability also adds to oil price growth.

Simple market competition is also the driving factor for oil price growth. While oil producing countries and organization like OPEC and OECD compete with each other in oil supply, the economies of developed countries and expanding economies of large Asian countries compete in oil consumption. Thus, the growing oil production cannot satisfy the growing demand on crude oil. BP energy statistics shows that global oil consumption is on its peak now, while oil production in 2010 declined on 2.6%. (BP, www.bp.com) Growing demand and falling production lead to price growth.

It is also necessary to return to main oil producer in the world, OPEC. OPEC, or Organization of Petroleum exporting countries, was created in 1965. From the economical point of view, OPEC is the cartel, the organization of competitors, which defines the fixed price on its production. OPEC defines its function as the stabilization of oil price on the global market. However, OPEC uses all benefits of cartel and manipulates the global oil market changing the quota of oil production. In 1975, for example, Arab countries members of OPEC implemented oil embargo and provoked global oil crisis. Analytics say that the role of different cartels in global price growth is significant, and OPEC is among these cartels. Global community cannot ignore the politics of OPEC because nowadays OPEC holds 44% of world crude oil production and approximately 79% of global crude oil reserves. (www.opec.com). Members of OPEC try to keep oil production on rather low level to keep the price high and to get high revenues. However, after oil market modernization and increase of oil production in Russia the influence of OPEC slightly decreased. Nowadays OPEC and non-OPEC oil producing countries compete on oil market, but this competition doesn’t lead to significant oil price fall. Some new factors serve as new potential limits of oil production, among them are the “oil peak” – hypothetical peak of oil production before the production shortage – and environmental concerns.

Thus, it can be concluded that OPEC keeps the oil price high and it still has enough influence to continue manipulating oil prices. OPEC oil production policy is one of key factors in oil price forming.

Conclusion

There are several important factors having influence on oil price. Among them are geographical factors (some rich oil fields are located in the regions of severe climate), political factors (political instability in oil producing region leads to price growth), environmental factors (risk of ecological catastrophe is too high to increase the offshore drilling), financial factors (new oil field requires approximately 10 years to become profitable), regulative factors (state and federal taxes also increase the oil price) , infrastructure factors (lack of oil refining plants), psychological factors (concept of oil peak allows keeping the crude oil price high), and market factors (oil-producing countries define the price on crude oil). As it seen, some of these factors can be removed relatively fast and easy, for example, new refining plans can be built and state and federal taxes can be reviewed. However, other factors cannot be removed at all; for example, the severe climate in North America. It can be ended that in general these factors are too powerful to allow oil price decrease.

 

Works cited

“Crude Oil and Total Petroleum Imports Top 15 Countries” U.S. Energy Information Administration. March 30, 2011. Retrieved April 20, 2011 from http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
“OPEC: brief history”. OPEC web site. Retrieved Apric 20, 2011 from http://www.opec.org/opec_web/en/about_us/24.htm
“The Obama Administration Is Slowly Reissuing Offshore Drilling Permits” Institute for Energy Research, March 23, 2011. Retrieved April, 20, 2011, from http://www.instituteforenergyresearch.org/2011/03/23/the-obama-administration-is-slowly-reissuing-offshore-drilling-permits/
BP. “Statistical Review of World Energy 2010” BP.com. Retrieved April 20, 2011, from http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
Green, K., Hayward, S. “The Dangers of Overreacting to the Deepwater Horizon Disaster”. AEI Online. Monday, June 14, 2010. Retrieved April 20, 2011, http://www.aei.org/outlook/100965
Institute for Energy Research. «The Obama Administration Is Slowly Reissuing Offshore Drilling Permits». March 23, 2011. Retrieved April 20, 2011, from http://www.instituteforenergyresearch.org/2011/03/23/the-obama-administration-is-slowly-reissuing-offshore-drilling-permits/
International Energy Agency, Organization for Economic Co-operation and Development, Nuclear Energy Agency. Projected costs of generating electricity: 2005 update. OECD, 2005.
Phelps , C. “Review: Kalt’s The Economics and Politics of Oil Price Regulation: Federal Policy in the Post-Embargo Era”. The Bell Journal of Economics. Vol. 13, No. 1 (Spring, 1982), pp. 289-295. Retrieved April 20, 2011, from http://www.jstor.org/stable/3003452
Pye, J. “Obama Administration’s driving off domestic oil exploration” Netboots media center. February 8, 2011. Retrieved April, 20, 2011 from http://www.unitedliberty.org/articles/7735-obama-administrations-driving-off-domestic-oil-exploration