<VV> Expensive Gasoline

[Jim Simpson]

At the risk of fanning the flames -- no pun intended -- it might be helpful
to actually research the reasons for the price of fuels in the US and where
hydraulic fracking came from.  Wikipedia has some good articles and if you
want to go further they have extensive lists of references.

Prices of petroleum products, including gasoline, at least in recent years
have been largely driven by the laws of supply and demand.  Global economic
growth has created an increasing demand for fuels of all types -- gasoline,
coal, fuel oil, natural gas, etc.  Higher demand, coupled with a relatively
inelastic supply, means higher prices.

Of course higher prices means more exploration for new sources as well as
research on alternative sources.  With higher prices, previously marginal
sources such as the tar sands in Canada become economically feasible to
exploit.  But these source both take time to be developed and the companies
who are going to develop them have to have a high confidence that the
prices are going to remain high enough to recover their investments.  Early
investors in tar sands and a lot of oil drilllers got badly burned in the
early 1980s when the price of petroleum crashed after peaking in the late
'70s and they couldn't compete on cost.  These factors tend to keep
supplies inelastic which means prices tend to fluctuate rapidly -- small
changes in demand drive prices up and down seemingly out of proportion.

US prices reflect global demands.  Even if a US company could produce oil
at a negligibly low price, why would they sell it for less than the global
market price?  The company has to answer to its it stockholders.  Hence if
they can sell oil to say Japan or China for $90/barrel, why would they sell
it for less in the US (not counting transportation costs)?

Some countries do have remarkably low gasoline prices -- lower than the
global market place price of the raw materials, but these are due to a
combination of high local availability and government policy to hold prices
low.  They can do this by controlling the market (or having state-owned oil
companies) and in effect subsidizing the domestic market.  (Think Saudi
Arabia and Venezuela for instance.)  The US espouses a free market, so
other than imposing some relatively modest taxes, doesn't control gasoline
prices.

I would argue that US gasoline prices basically reflect the price of
materials, transportation, refining, some profits and taxes and are
essentially the "real" price for gasoline in a free market.  One
consequence of this is having a fluctuating price for gasoline.

Fracturing of oil bearing formations has a long history.  For instance, it
was done with explosives in the Pennsylvania oil fields back in the 1860s.
Hydraulic fracturing goes back to experiments in 1947.  The early attempts
were not very successful, but the techniques improved and were applied in
numerous places world-wide to both oil and natural gas production.

Modern "fracking" -- hydraulic fracturing of natural gas bearing shale and
sandstone formations -- required new and more complex techniques.  The US
Government initiated the "Eastern Gas Shales Project" in the 1970s as a
series of public-private partnerships.  In 1977 the Department of Energy
pioneered hydraulic fracturing in tight sandstone formations.  This lead to
further commercial development  of "slickwater fracturing" which makes
shale natural gas extraction economical.  Both government and industry have
had a part to play.

The bottom line politically is that no single administration has had much
short-term influence on either the price or availability of fuels during
it's term in office -- finding and developing new sources simply takes too
much time.  Prices are driven not by politics but by global market forces.
Governments have had some influence such as by funding fundamental research
in hydraulic fracking during the Carter administration (although the idea
probably germinated earlier in the Ford administration), but the visible
results come much later (decades later).  So no recent administration --
neither Bush nor Obama -- can reasonably take credit for the current glut
(and low price) of natural gas today.

(And you might think about what the low price of natural gas has done to
coal prices and coal field employment.  Electric utilities gravitate toward
the least expensive energy sources.  Natural gas has undercut coal prices.
Between price, better response of gas turbine electric plants and
environmental benefits, natural gas is knocking coal out of the market
place.)

The world really is a complex and interrelated place.

Jim Simpson
Group Corvair