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The real reason why gasoline costs more

By Alan Caruba
web posted July 30, 2007

Finding, extracting, transporting, and refining crude oil is a very expensive business. It is also a very risky one. There are no guarantees that one will find oil and, finding it, there are no guarantees that the investment and all the assets involved will not be stolen by the governments that invited oil companies to tap their natural resources.

If you want to know why gasoline and everything made from oil is going to cost more in the years ahead, I give you, ladies and gentlemen, Hugo Chavez, dictator of Venezuela, and a number of other nations who have engaged in extortion.

On June 26, Hugo Chavez told the Big Oil companies that had invested in Venezuela's Orinoco Belt that they were going to have to sell their assets at a ridiculously low price to Petroleos de Venezuela (PDVSA), the state oil company. They were instructed to hand over majority control as part of Chavez's nationalization program.

In power since 1999, this disciple of Fidel Castro fired 75% of the managers of the state company after they staged a strike in 2003. Only the increased investment by foreign-owed companies kept Venezuela's oil industry from total implosion. This year he showed his appreciation by forcing out British Petroleum, Chevron, Total, and Norway's Statoil. ConocoPhilips and Exxon Mobil Corporation have since concluded they too could not continue their operations in Venezuela.

The popular myth about Big Oil is that it wields such great power that nation states cannot resist them. The reality is that, faced with dictators like Chavez, often the only alternative is to leave or cut the best deal they can. The other reality is that Venezuela's oil production has declined 25% since Chavez, a committed Communist, crushed the strike. With the major oil companies departing, how much greater a decline lies ahead? That is just one reason gasoline will cost more.

Russia may no longer be officially Communist, but it continues to be run like a Communist state. As Business Week recently reported, in June Russia "forced BP to sell a controlling stake in a massive east Siberian gas field called Kovykta for around $700 million—a fraction of the project's potential value. Last year, Moscow strong-armed Royal Dutch Shell PLC into giving up control of its big Sakhalin II gas project in the Far East, and it's now battling Exxon Mobil over a similar field nearby."

Our neighbor to the south, Mexico, won't even allow foreign investment in its oil industry. Its nationalized oil company, Pemex, needs lots of capitol investment, but isn't getting it. That may lead to a decline in production.

Add to this the situation in Iraq that has caused a decline in oil production. Who can say what events will occur in Iran if it continues its intention to build nuclear weapons? Then add in the worldwide oil industry's need to grow by at least 3% annually to keep up with demand.

You're looking at a world that needs new production estimated at four million barrels per day and it's not going to happen. You don't just create production or refining capacity overnight. It requires lots of money, something the free market Big Oil companies have been willing to risk up to now. That's something Communists don't do.

There are other options, but right now the Democrats that control the U.S. Congress, led by Speaker Pelosi and Sen. Harry Reid, are howling like moon-besotted coyotes that the United States must become "energy independent."

Congress is refusing to allow known, vast oil reserves in Alaska to be extracted, nor facilitating exploration and extraction of other potentially vast reserves of oil and natural gas off the continental shelf of the United States. Indeed, they want to punish Big Oil for whatever profits they may have garnered from their investments in the Gulf of Mexico.

The vast matrix of insane "environmental" laws and regulations has made it impossible, i.e. unprofitable, to build a single new refinery in the United States since the 1970s. The New York Times recently reported that mechanical breakdowns in U.S. refineries "have created a bottleneck in domestic energy supplies", helping to drive up the cost of gasoline. Even if an oil company was to begin construction tomorrow, you're still years away from it coming on line.

Instead, the Democrats are wailing about "global warming" and "climate change", demanding the imposition of "cap and trade carbon credits" and, in general, racing toward the worst possible choices for a nation whose energy needs are being ignored in the name of fraudulent science and pure politics.

These are things you need to think about as the cost of a gallon of gasoline goes up at your local gas station or the price of heating oil rises as winter closes in on the northeast and elsewhere.
The mandated, increased production of ethanol from corn that Congress has imposed is already driving up food costs. Ethanol is so corrosive it cannot be sent through pipelines, so imagine what it doing to the engine of your car? As for the trucking industry on which the nation depends for the delivery of practically everything, its increased costs will just add to the cost of practically everything.

It is a "perfect storm" of international criminality when Communist thugs and others decide to line their pockets and bully the rest of the world. This is the kind of thing that causes wars and economic woes. ESR

Alan Caruba writes a column, "Warning Signs", posted on the Internet site of The National Anxiety Center. His book, "Right Answers: Separating Fact from Fantasy", is published by Merril Press. © Alan Caruba, July 2007


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