Gas War Essay, Research Paper

Gasoline is produced by a distillation process where crude oil is heated and fumes are captured and converted into many products such as kerosene, jet fuel, and gasoline to name a few. Therefore the price of crude oil, which is extracted from oil wells beneath the earths surface, is a major factor in gas prices. The five leading oil-producing countries and their approximate shares of the world supply of oil are: Soviet Union 21%, Saudi Arabia 17%, The United States 15%, Venezuela 4%, and Mexico 4%. These five countries made up 61 % of the worlds oil production back in 1980. Even though The United States is a major producer of oil, it does not make them self-sufficient. The United States uses more oil than they can produce and must look towards foreign countries. An organization called O.P.E.C. controls approximately four fifths of the worlds oil reserves in the non-communist world. The United States is forced to deal with O.P.E.C., not only in its own interests, but also in the interest of its allies and in the interest of maintaining peace. The former Soviet Union may now have an interest in selling some of their oil that they have a tremendous amount of. O.P.E.C. which stands for Organization of Petroleum Exporting Countries, is made up of 13 countries: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon. O.P.E.C. was founded in Baghdad, Iraq in September of 1960. It was organized in response to oil producing countries that did not consult with the Middle Eastern oil states before lowering their crude oil prices. The producers feared that other countries would establish monopolies. The aim of O.P.E.C. was to create a universal price between the countries, in order to ensure peace between oil producers throughout the world. O.P.E.C. also wanted to provide its members with technical and economic support in times of need, since not all the countries were completely stable. The headquarters were initially set in Geneva, but were later moved to Vienna in 1965. O.P.E.C.’s goal was to establish firmly unified prices amongst their members, but the organization was not always successful. In their quest for control over the world market of oil production, they have ran into several obstacles and setbacks.

O.P.E.C. has barely survived being eliminated due to internal conflicts amongst its members. Since O.P.E.C. almost has a strangle hold on the worlds oil supply, The United States is extremely concerned with the areas instability. The Middle East and the Persian Gulf area, where most of the members are located, are extremely prone to wars, both civil and cross borders, plagued by religious battles, and positions of power are frequently overthrown, making it hard for any stability to come out of the area. Any time there is chaos in the Middle East, The United States thinks back on “…memories of other troubles in the Persian Gulf area: the Arab oil embargo in 1973-74, the Iranian revolution in 1979-80 and Saddam Hussein’s invasion of Kuwait in 1990.” (1) The area is also vital to our allies, who would be crippled without Gulf oil, whose livelihood we are dependent on. In 1973 O.P.E.C. raised oil prices 70%. “The dominant Middle Eastern members of O.P.E.C. used succeeding price increases as a political weapon aimed at Western nations in retaliation for their support of Israel against its Arab neighbors in the so-called Yom Kippur War of October 1973. Prices were accordingly raised another 130% at the Tehran conference of December 1973, and a temporary embargo was placed on the United States and the Netherlands at the same time. Other prices increases followed in 1975, 1977, 1979, and 1980, which ultimately raised the price of a barrel of crude oil from United States $3.00 in 1973 to $30.00 in 1980.” (2) Almost every college student has heard stories from friends or relatives about the gas crunch in the 1970’s. People waited in lines that stretched for miles, and could only get gas on certain days depending on the first letter of your last name. O.P.E.C. used the money they raised to invest in other countries, placed in foreign banks, currency markets, and to help their own economies through inner development. O.P.E.C. is also extremely interested in maximizing profits, but in such a cartel, it is impossible to find a price that will maximize profits. O.P.E.C. has attempted to raise prices several times by cutting production. According to economic theory, a decrease in supply will yield higher prices. These are some of the reasons The United States must offer stability and continue to have troops in the area, intervening when the worlds oil and its prices are in jeopardy.

Currently crude oil prices are rising due to the bombings in Saudi Arabia. “…It has continued to soar, to more than $24 a barrel, up 34% from one year ago, the highest level since the 1991 Persian Gulf War.” (3) This increase has been contributed to several factors: 1) the rising demand of crude oil throughout the world 2) the tight inventories because of the belief that supplies are going to run low 3) the current turmoil that exists in the area and 4) heating demands of the abnormally cold winter. These factors have already raised the prices of diesel fuel, jet fuel, and home heating oil. This is of major concern to truckers, airlines, and home heating oil companies. As a result of these price increases, airline ticket prices will also increase. These are just a few of the elements that effect prices, but none of them have the power to greatly change the price that exist at the pumps. The demand of crude oil is always cyclical. The United States demands more gasoline in spring and summer months than in the fall or winter, due to people driving more. The current trend in vehicles has moved to larger sport utility vehicles from small economy cars of the past and consume more gas and get less miles per gallon. The country is constantly searching for new and more efficient forms of energy. More importantly the country is searching for means of energy that will not make Americans poorer. The following chart shows the price of oil per barrel over the last year. These prices match the increases that take place at the pumps.

Countries around the world are hanging on the decision of Iraq, regarding renewal of oil sales. However, the fact remains that if Iraq indeed decides to renew oil sales, will prices really drop? Even if Iraq gets back into the business of selling oil, it would be unlikely to cause a drastic shift in the price of a gallon of gasoline. Saddam Hussein’s actions have not been stable in the last few months. Iraq was supposed to begin exporting on Memorial Day, but due to erratic behavior, talks have been put on the back burner. Since there are so many factors involved, even if Iraq exports a tremendous amount of oil, consumers will probably not know the difference. Other factors, other than the demand and price of crude oil in the world effect prices.

Several interruptions in The United States production of oil has staggered the countries production. The United States is the only major oil-producing country where oil producing grounds are owned by the land owner and not property of the government. This makes for inefficient drilling since one party is not completely responsible for gathering all the oil. Average production per well is only 15 barrels per day, far less than any other oil producing countries. Alaska has the best oil producing land, but due to the land and harsh climate, it makes it hard to gather. It is also very expensive to develop methods of transportation which slows gathering of the oil. “Several refineries—on the West Coast, in the East and on the Gulf Coast – have experienced operational difficulties which affected product supplies in the marketplace.” (4) It is rumored that their are supply tanks buried somewhere near the Gulf of Mexico that could support the country for 66 days if anything were to happen. The United States and other countries have been looking into alternative forms of energy in order to lower their dependency towards foreign oil. Money is being spent into researching solar, hydro, nuclear, and alternate forms of energy.

Government regulations also create changes in gas prices. California has recently gone threw price increases at the pumps due to new legislation. The state is heavily overpopulated and has the worst smog of all the states. California gas stations are changing to a cleaner gas that will cause less air pollution, but will be more expensive. The increase is approximately 10-12 cents. That is the price Californians are going to have to pay for cleaner air. Another government regulation is aimed towards the refiners of the oil. The government is putting pressure to change from their winter grades which are oxygenated, to summer grades that have lower evaporability, helping the environment. These costs to switch fuel show up at the pumps, the public has to pay for governmental research and environmental precautions. The United States doesn’t have it as bad as some other countries. The U.S. pays an average of $1.21 per gallon of gasoline. Japan pays $5.35/gallon, Germany pays $4.04/gallon, The United Kingdom pays $3.38/gallon and Mexico pays $1.55/gallon. All four are significantly more than the United States pays.

Taxes are the largest component of the prices we pay at the pumps. “Taxes were the single largest component cost of gasoline, amounting to 42.4 cents per gallon, including 18.4 cents per gallon in federal taxes, 22 cents per gallon in weighted average state taxes and an estimated 2 cents per gallon in local taxes.” (5) The President of The United States of America, Bill Clinton, has on several occasions proposed to increase the taxes put on gas. In 1993 Clinton proposed a gas tax that raised the prices at the pumps by 7.5 cents per gallon, a 6% increase of the price. Then in 1996, Bill Clinton made a proposal to raise gas taxes by an additional 2.5%. Clinton wanted to raise prices 10 cents per gallon overall in his four years in office, all part of his “deficit reduction plan”. (6) Clinton’s entire campaign was based around not hurting the American people with taxes, but once in the white house, has made the record books with the highest amount of gasoline taxes ever. Taxes are so much a part of the prices we pay that “…in 1981 when pump prices where at an all time high of $2.27 per gallon, the taxes were just 27.7 cents per gallon. The real cost of motor gasoline to consumers fell by about a dollar per gallon between 1981 and 1995, but over the same period federal, state and local motor gasoline taxes increased by nearly 15 cents per gallon.” (7) Taxes in the United states have increased an average of 15.6% in the last three years. mThis chart shows some United States cities and the price increases.

Many factors influence the prices of gasoline. Gasoline prices are affected by the price of crude oil in the world market, supply and demand for gasoline, local market competition, temporary supply interruptions, government regulations, or taxes. Everyday new things can happen to change the prices that American consumers pay at the pumps. The United States is dependent on foreign oil and must continue to ensure stability in the Middle East, or until we have found alternate sources of energy. Taxes will continue to climb due to the rise of government control. Regulations will continue to become stricter until gasoline usage is more environmentally friendly. It looks as if gas prices will continue to fluctuate, but over time will tend to rise.

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