Why is gasoline expensive?

The short answer is: we are running out of affordable oil.

On March 28, 2022, the California Energy Commission reported gasoline averaged $5.76 per gallon: 14 percent for local, state, and federal taxes, 41 percent for refining and distribution, and 45 percent for the crude oil. Taxes are fixed percentages, and refining and distribution costs are relatively stable. However, the price of crude oil has ranged between $32 and $115 per barrel in the last 2 years

In the beginning, a driller could literally pound a hole in the ground, and oil gushed out under pressure. The easiest fields were developed first, but drilling technology improved, giving access to deeper deposits. As a field matures, the pressure fades, and pumping is required. When that production falls off, more elaborate extraction methods are needed, such as pumping water into the field to float out the last of the oil deposits. As demand increased, oil companies scoured the world to find all the deposits available.

Since oil reserves are finite, the production of every field follows a typical curve: rising rapidly in the beginning, peaking at some point, and then inevitably declining to where the cost of extraction exceeds the value of the oil produced. The field is then considered depleted. In 1956, Shell Oil geologist M. King Hubbard suggested that US reserves in the lower 48 would peak before 1971. Widely ridiculed at the time, US production did peak in 1972, upsetting the global economic order as the US lost control of the price of oil and OPEC soon took over that role.

Since the 1960’s, global oil depletion has exceeded the discovery of new reserves. In 2005, global production of conventional oil peaked, meaning most global conventional oil fields have peaked, or are in active decline. In 2008, oil spiked to $125 a barrel, contributing to the economic meltdown.

Conventional oil is defined as being produced by historic methods, while unconventional oil is defined as deep water, shale oil (fracking), or tar sands. Developing these resources is more costly, so increasing this type of production raises prices. One of the earliest US developments of this sort is the North Slope of Alaska, which first produced oil in 1977, peaked in 1988, and is down 75 percent today. It is a difficult area to access, requires a long pipeline to ship the oil out, which must be heated to keep the oil from freezing. Now the permafrost is melting, requiring refrigerating the ground to prevent the pipe from breaking apart, adding more to the cost.

Deep water oil, such as in the Gulf of Mexico, is also expensive. The Deepwater Horizon made world news in 2010 when it exploded. It was in water a mile deep and drilled into the bedrock another 3.5 miles.

Rather than pulling millions of barrels from a single large reserve, fracking is like pulling a single barrel from a million puddles. Despite the increased expense, in 2010, US production boomed. But individual well production drops by half in the first couple of years, demanding constant drilling of new wells. By 2020, the industry had lost over $300B. In addition, fracked oil doesn’t produce diesel very well, which is why the price of diesel has been above supreme gasoline for over a decade. Since diesel is so integral to American food production, food prices have risen.

In 2018, global oil production, including unconventional sources, peaked, but the pandemic shrunk demand, diminishing the impact. Now that the world economy is recovering, demand has increased, and the Russian invasion has restricted supply, resulting in a sharp price increase.

In 2021, the US oil production was 11M b/d (barrels per day), and consumption was 17M b/d, with .7M b/d imported from Russia. President Biden just announced that the strategic reserve will release 1M b/d for the next 6 months, which should have some effect on domestic prices, but worldwide disruption will still be extreme. The Saudi’s were asked to increase their output by 1M b/d, a 10 percent increase, and they refused. Maybe they want the increased income, but maybe they can’t produce more oil. They have been pumping in water to boost production for over 20 years, indicting their fields may have peaked.

The age of affordable oil has ended. Yet another reason to switch to renewables as fast as we can.