The rising price of crude: What's in your wallet?

I just filled up my pickup with gas again yesterday--Ouch! Taking a little camping trip up to Cedar Breaks is getting painful these days. One of the most concrete examples of how seemingly remote global events have local and individual effects is the rising pump price at your corner quickmart. But don’t blame the quickmart owner. It’s not his fault.

First, a primer on what you’re paying for at that pump. According to an estimate by the U.S. Department of Energy (your mileage may vary) here’s how the costs break down for today’s $2.00 gallon of gas:

• Around 62 cents comes right off the top for federal and state taxes, sales taxes, and in some cases local or city taxes.

• About 26 cents pays the refineries to turn that sticky black stuff into something that will actually make your vehicle run.

• Another two bits goes to distribution costs, and for the company to market itself. There’s also a sliver of profit--just a few pennies really--for the quickmart.

• The biggest chunk still goes to pay for the oil that had to be pumped out of the ground somewhere. In the U.S., about 86 cents (43 percent) of your hard-earned two bucks goes to pay for the crude in that gallon of gas.

And the price of crude, my friends, is way up. The per-barrel price of oil is 59 percent higher than last year, and has shot up by 30 percent just since June. Last Thursday oil shot to nearly $49 a barrel. That was a 20-year high in absolute terms (although, adjusted for inflation, oil is still less per barrel than in 1990). Yesterday, oil retreated slightly to $45, but the trend is clear. Experts are talking about $50 per barrel by the end of the year.

The most obvious reason for the increase is the so-called “security premium” stemming from the threat of terrorism and the war in Iraq. Crude prices are extremely sensitive to any threat--or just a perception of threat--to the flow of world supply. For example, the cause of last week’s spike was the fighting with radical Shiite militia which increased the chances of more attacks against Iraq’s oil infrastructure. This week, crude prices dropped when that threat subsided and more Iraqi oil flowed. But Iraq isn’t the only factor:

• Saudi Arabia, the world’s number one oil exporter, has its own security premium to factor in. More importantly, the Saudis can no longer manipulate oil prices just by promising to boost production. A large portion of Saudi oil reserves claimed are in undeveloped fields, or are non-existent “paper reserves”. A Saudi announcement of plans to increase exports no longer pushes crude prices down dramatically.

• In Russia, the world’s second ranking exporter, Vladimir Putin’s push to collect back taxes owed by the giant oil company Yukos has added to global supply fears. The company accounts for 20 percent of Russian oil exports. In July, Russian courts ordered Yukos to stop all sales which quickly prompted higher crude prices.

• Venezuela ranks fifth among oil producers and is a particularly important source of crude for the U.S. (behind Canada, Mexico, and Saudi Arabia). But the potential for political upheaval in Venezuela is high under the leftist, very anti-U.S. leader Hugo Chavez. Up to 11 percent of our oil supply now comes from Venezuela.

Then, on the demand side, there is a new 600-pound gorilla in the market. China is now the second-biggest consumer of crude oil in the world, behind the U.S. The burgeoning Chinese economy, which is rapidly becoming the world’s factory floor, is expected to import 20 percent more oil and refined products than last year.

The next time you’re at the gas station, take a moment to reflect that the simple act of filling your tank puts you in a global marketplace affected by combat in Iraq, elections in Venezuela, and a whole bunch of Chinese commuting to work on their new Mo-peds.

T.T.

©2004, WestRim Digital Arts