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Oil and Gas FAQs Table of Contents1. What are crude oil and natural gas?2. Why does gasoline cost so much?4. Will my heating bills increase this winter? 5. What is OPEC and does it really control world oil prices?6. Are we running out of oil and gas?7. How will oil and gas supply and demand change over the next twenty years?1. What are crude oil and natural gas?
2. Why does gasoline cost so much?According to the American Automobile Association's 2005 transportation cost study, the average annual cost of owning a car is 51.6 cents per mile if you drive 15,000 miles per year or $7,740. The cost of gasoline is 8.2 cents per mile. Gasoline is made by processing or refining crude oil. The cost of gasoline is shown in the following table:
The two largest cost components are crude oil and taxes which comprise about 73% of gasoline price. In the United States taxes include both a Federal and State tax. Both of these taxes are levied as cents/gallon rather than as a percent of price. State taxes can vary considerably depending on the need and philosophy of the local government. The price of crude oil, which is 46% of pump price in our example, is a large factor in determining pump prices and in causing prices to fluctuate.
Although many consumers believe that oil companies are gouging the public, the reality is that profits in refining and marketing have been pretty bad as illustrated in the following plot:
[Use control + click to view full-size image]
3.
What is the maximum amount of gasoline that a refinery can produce?
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Please check the following sites for
additional information on winter natural gas prices:
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EIA's Natural Gas Update - for the latest statistics |
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EIA's Residential Natural Gas Prices: What Consumers Should Know |
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EIA's Natural Gas Basics 101 - primer on the basics of the natural gas industry |
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5. What is OPEC and does it really control world oil prices?
OPEC is the acronym for the Organization of Petroleum Exporting Countries. It is composed of the following twelve members: Algeria, Angola (joined on January 1, 2007), Ecuador (joined OPEC in 1973, suspended its membership from Dec. 1992-Oct. 2007), Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The organization was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Its membership is limited to "any other country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of member countries.
The demographics of member countries are similar yet, in some ways, very different.
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Members are from around the world - Algeria, Angola, Libya and Nigeria (Africa); Indonesia (Far East); Ecuador and Venezuela (South America) and Iran, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates (Middle East) |
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The Moslem belief is the dominant religion and Arabic is the principle language |
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Population ranges from 700 thousand (Qatar) to 216 million (Indonesia) |
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Oil reserves range from 0.4% (Qatar) to 25.5% (Saudi Arabia) of world reserves |
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Gas reserves range from 0.9% (Libya) to 15.7% (Iran) of world reserves |
OPEC holds 78% of oil and provide 41% of supply or 60% of internationally traded oil. OPEC holds more than 43% of world’s natural gas and produces 16% of supply. OPEC members seek prices that would provide for a healthy world economy, minimal incentives for alternative fuels, and sufficient cash flow to invest in new production facilities.
[Use control + click to view full-size image]
OPEC seeks to control world oil prices, but this is a very difficult undertaking. Even though OPEC provides 41% of the world's oil, it is subject to variables that it cannot control which will influence prices. These variables include economic growth, weather, political situations and new technologies. OPEC attempts to influence prices by adjusting the production of individual members through output quotas. OPEC tries to anticipate future world oil demand and define quotas that will meet the demand and provide for prices within a range of $22 to $28/B.
Please click on the following link to see a graph
of the current OPEC Basket Crude Oil Prices.
If demand exceeds their forecasts, prices can rise resulting in lower economic growth and protests from consuming country governments. If demand is less than anticipated, prices can drop resulting in lower incentives to find oil resources, reduced interests in energy conservation and increased use of fossil fuels contributing to global climate change. While it might seem strange, oil producers and environmentalists would both favor higher prices --- producers obtain profits to help find more oil and grow their companies and environmentalists achieve incentives to reduce fossil fuel consumption and invest in alternate energy.
It is also naive to view OPEC as a homogeneous family where all countries share the same goals and strategies. Although the role of the oil industry in each member country varies, OPEC members depend on oil exports to provide for income for the overall economy. That means that these countries use oil income to build roads, hospitals and schools. This money is also used to develop other businesses and industries. Some of this money is also used to support internal and external political agendas and the lifestyles of governing officials and families. These member companies debate these production changes at periodic meetings and arrive at production quotas. These quotas are only targets and OPEC has no methodology to force member countries to comply with them. Overproduction and creative accounting have often been used to allow member countries to raise production.
OPEC's desire to control prices is also driven by a desire to have a stable income for their country. How would you like to have your income change up and down each month. What if your income was halved one year and then doubled the next. It would be hard to plan on new purchases and if it got too low meet basic expenses like food and shelter. That is OPEC's problem and reason that it wants to control prices.
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(Source: Energy Information Administration, OPEC Revenues Fact Sheet)
In OPEC's forty years of existence they have generally not been able to control prices. They abandoned the OPEC basket as a price setting mechanism in 2005.
Please check the following sites to
learn more about OPEC:
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6. Are we running out of oil and gas?
Please see the
Learning
Center - Are We Running Out of Oil & Gas?
for an explanation.
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7. How will oil and gas supply and demand change over the next twenty years?
Please see the
Learning
Center - Energy Forecasts for information.
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of Contents
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2000
PetroStrategies, Inc.
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