Rising Oil and Gas Prices

Steven Mufson
Washington Post Staff Writer
Tuesday, July 29, 2008 12:00 PM

Washington Post Staff Writer Steven Mufson, who also writes the Energy Wire blog, will be online Tuesday, July 29 at 12 p.m. ET to discuss The Post's five-part series on why oil and gas prices are so high.

About this series: The Washington Post examines the economic forces that have unhinged oil prices from their longtime cyclical patterns, propelling fuel costs to once unimaginable levels that are now both fraying the lifestyles of our recent past and speeding the search for an energy source of the future.


Steven Mufson: Thanks for joining me today. There are a lot of questions and I'll do my best to answer as many as possible. I want to caution at the outset that there are a lot of unknown factors that go into the energy picture. What we're trying to do with this series of articles is present information that people can find helpful when thinking through the extraordinary runup in oil prices and how we might respond to it as we move forward.


Washington, D.C.: Sir....your article failed to mention that we, the U.S., have the largest untapped oil reserves in the world.

Doesn't the fact that we have decreased our production, leading towards the lack of supply and increased global demand, the main reason for the price increases? If we produced more, it would cost less.

Steven Mufson: The United States does not have the largest untapped oil reserves in the world. The largest reserves are in Saudi Arabia, Iran and Iraq. We haven't made a conscious decision to reduce our domestic oil production. The United States is the most explored place in the world. Any additional production would help ease prices, and the United States might be able to increase production somewhat by opening up some offshore areas, but we will never be self-sufficient unless something dramatic happens to our consumption of oil. Even then, it will be challenging. Reducing our reliance on imported oil is a realistic short and medium term goal.


Woodbridge, Va.: Can you please explain how oil companies can make such a huge profit every quarter if gas is really costing them more to buy. I understand what "supply and demand" is, but I'm having a tough time comprehending how oil companies get a tax break, consumers pay much more, and the companies are making record profits.

Also, do you think speculators really have an influence in oil prices?

Steven Mufson: Oil companies that have their own production in the United States or shares of production overseas benefit from high oil prices. Even if they have refining and marketing operations, with prices this high, profits from production of crude oil outweigh any crimp in profit margins in what the business calls "downstream."

As for speculators, that's a tough question. Speculators is a loaded, negative term. The way I think about it is this: Over the past few years there has been a huge amount of new money invested in oil markets by hedge funds, pension funds, investment banks and other financial players who have nothing to do directly with the oil business. They don't use oil; they invest in it.

Most economists will tell you that that won't affect prices, that it will add liquidity and that there won't be a bubble if you don't see an inventory buildup. What I think (at the moment, anyway) is that tighter oil markets have created upward momentum in oil prices and that the flow of money from financial players into the oil market has exaggerated that move. How much is hard to say. But I think that's one reason why we see these big swings in prices over short periods of time.

I also refer you to this item in our blog, Energy Wire.



Edgewater, Md.: Why will the Speaker of the House not allow a vote on offshore drilling?

She reports that she is trying to save the planet and will not allow a vote because she is in power. I thought our elected officials were there to serve the citizens. She continually says we can not drill our way out of this problem, but when President Bush lifted the Executive Order, prices fell immediately after the announcement. I guess the laws of supply and demand still work.

Steven Mufson: The drop in prices has nothing to do with President Bush's announcement, I'm afraid. If you believe in supply and demand, surely you recognize that his announcement has no effect on supplies over the next ten years and no one is buying oil futures that far out. Someday it will affect the supply and demand picture, but it will take a while even if Congress decides to go along with it.


Santa Barbara, Calif.: This seems like such a simple, black-and-white issue: Oil is a finite supply, and the world is using it up at an ever-increasing, astonishing rate. Furthermore, the supply is not evenly distributed to everyone like the air we breath, but the vast majority is held by a small number of countries whose rulers are not above using the oil supply for their political ends. Why should the gas price not go up? The fact that it's still as cheap as it is, is the surprising factor.

Steven Mufson: The distribution of supply is a very important point. The three countries with the biggest oil and gas reserves are all in the Middle East and that makes access and stability issues.

I'm not sure I'd say gasoline is cheap in the eyes of most Americans, who see it as a burden at this price. I wouldn't want to forecast prices, but it obviously can go higher than we imagined until recently. And that is without pricing in any costs for greenhouse gas emissions, something that could happen in the next administration under either McCain or Obama.


Staunton, Va.: Hi Steven, thanks for taking questions. I trade currency futures for a living and while I don't trade oil and gas futures I keep an eye on them. If anyone has any doubts as to the correlation between the value of the dollar and the price of oil they= should take a look at some charts. The correlation is unbelievable. Today oil is down 3-4 bucks -- the dollar is up considerably. My question is if there are 31 gallons in a barrel of oil, we should be able to divide the price of oil and arrive at the minimum gas price. Gas is almost always significantly cheaper than this. Oil is now at $121 but gas is at $3. $121 divided by 31 equals $3.90. Who is eating the $.90 or can the refineries get more than 31 gallons of gas from 31 gallons of oil? Sorry for the long question.

Steven Mufson: There are 42 gallons in a barrel of oil. So figure about $3 for the crude, add in something for transportation, another chunk for refining costs, then some marketing and taxes, a bit of profit and voila!


Reston, Va: Although supply - demand is a component of pricing, I sense that the pricing of risk as introducted in market speculation is the greater cost driver. For example, per SmartMoney on the storm that recently moved up the Gulf. "The per-barrel price of crude had been rising on concerns the storm would knock out some energy infrastructure assets. But as the storm passed investors sold off oil. It dropped almost $4 to the $128 level".

In other words, the consumer winds up paying for an event that never happened. In this case, the consumer will pay $4 more per barrel just because a storm could have damaged some of the oil rigs out there.

Also, political tensions are quantified and added as cost-based risk all the time.

Steven Mufson: Supply and demand is fundamental. Then there are risk calculations. One energy economist at an investment bank once put it to me like this: Suppose you think a catacylsmic political event would raise oil prices by $50 a barrel and you think the odds of it are 30 percent. Maybe you would pay $15 more for a barrel. But if that event doesn't happen, you have to eat whatever premium you paid. You could try to force it on consumers, but you probably won't be able to force much of it through the system if there's price resistance and enough other supplies around at cheaper prices.


Philadelphia, Pa.: Has the war disrupted oil production in Iraq and how much of an influence has any lowered Iraqi oil production been on the market?

Steven Mufson: The war did disrupt oil production in Iraq, but it has recently crept back up to where it was before the U.S. invasion. It's important to remember that even before the war, Iraqi oil production was lower than it could have been thanks first to the Iran-Iraq war in the early 1980s, then the aftermath of Saddam Hussein's invasion of Kuwait and the first Gulf War. Most oil executives and analysts I talk to believe a peaceful Iraq could produce 6 million barrels a day, which would have a huge impact on oil markets. Hard to say when we'll see that, though.


Am I the only person that remembers Jimmy Carter?: Personally, I think we rely on the national government way too much. If we had followed up on Carter's alternative forms of energy back in the 70s, we wouldn't be in this mess.

The problem isn't with the government - it's with the idiots who bought SUVs, 3,000 square foot homes, and turn every light on in their houses.

How do we get THOSE people to get a grip on reality, stop complaining and DO SOMETHING?

Steven Mufson: Two thoughts on this.

1. The government can make a difference by setting standards (we could have raised CAFE fuel efficiency standards a decade or two ago) and by setting prices (through gasoline taxes, which haven't been raised in years).

2. High prices have changed the buying habits of Americans. That's why you've seen a huge drop in purchases of SUV's.


San Antonio, Texas: What prompted you to write today's story about California's oil history? The series? Were you traveling yesterday with the McCain campaign? Will you do more stories before the November election?

Steven Mufson: It is a complete coincidence that McCain was in Bakersfield the day before our Bakersfield datelined story appeared. I was in Bakersfield in late June. I chose it because of its long history, because of Chevron's generous willingness to show me around there, and because California has produced about a third of the oil ever produced in the United States


Fairfax, Va.: You mention production peak in the Sunday article, will you delve into the "Peak Oil" theory and what life in the industrial world may look like post peak. It seems that even the Speaker of the House is unaware of Peak Oil, she suggested that deposits into the Strategic Petroleum Reserve be suspended until the price of crude drops below $73/Barrel. One would think she is out of touch or maybe she is just being a politician.

Steven Mufson: The theory of "peak oil" is not a theory. If this is a finite resources that takes millions of years for nature to produce and if we're burning it up at this rate, there will be a peak out there somewhere. The controversial question is "where?" When I covered oil and gas for The Wall Street Journal in the early 1980s, lots of people talked about running out of natural gas or oil. Technology can alter the outlook dramatically. But someday it will be true and we can only be getting closer so it's worth thinking about things we can do before it's a crisis (or more of a crisis).

As for the Strategic Petroleum Reserve, it's obviously not a permanent answer to supply concerns. If you support the release of some supplies, you should support it because you believe there are temporary factors (supply related, or maybe a financial bubble) that will pass and that a limited release will help ease.


Berks County, Pa.: Home heating oil has doubled from about $2.00 a gallon two years. Is there any end in site or should I start knitting some warm sweaters now?

Steven Mufson: It's certainly possible that prices will fall further, perhaps substantially further. But I don't think you'll see $2 a gallon heating oil again and some warm sweaters probably wouldn't be a bad idea anyway for US energy security, greenhouse gases, and your pocketbook. (not necessarily in that order)


Washington, D.C.: While we applaud Steven Mufson and the Washington Post for their fine, if overdue, article on world oil (27 July 2008), we are dismayed to see the article repeat the common misconception that there was an OPEC oil embargo in 1973. (Gal Luft also makes this mistake in his op-ed in the Washington Post on 6 July 2008.) The organization that proclaimed and implemented the embargo was not the Organization of the Petroleum Exporting Countries (OPEC) but a separate grouping, the Organization of Arab Petroleum Exporting Countries (OAPEC). Created in 1968 by Saudi Arabia, Kuwait, and Libya, OAPEC's membership in 1973 also included Algeria, Bahrain, Egypt, Iraq, Qatar, Syria, and the United Arab Emirates. Although OPEC took advantage of the embargo -- and supply and demand conditions -- to raise oil prices, its non-Arab members did not participate in the embargo. Iran and Venezuela even increased their exports, as did Iraq, which did not participate in the embargo although it was an OAPEC member. This common but fundamental mistake obscures the specifically Middle Eastern origins of the 1973-74 embargo and undermines one's confidence in an otherwise informative article.

David Painter, Anand Toprani

Department of History, Georgetown University

Steven Mufson: Thank you for this good and fair point. The embargo was declared by the Organization of Arab Petroleum Exporting Countries.


DC: Why do other countries have such higher gas prices than ours? Are their prices increasing or are we catching up?

Steven Mufson: Other countries, especially in Europe, have higher prices because they heavily tax petroleum products. The price of diesel in Britain reached as high as $10 a gallon recently. But many countries still subsidize oil products, especially oil producing countries where consumption is growing quickly.


Freising, Germany: In one way, it's strange to be in the situation where oil and natural gas prices are going through the roof, because ever since I was a school child, I was told by teachers that petroleum supplies were going to run out in the near future. As a kid, I would have thought that some smart people would start looking at alternatives...

How is research into coal-to-liquid coming along, as well as finding and developing more effective sources for biofuels? Corn based fuel han't really been the panacea has it?

Steven Mufson: Coal to liquids is technologically feasible. It is bad from a greenhouse gas point of view and I don't expect to see much of it. Corn-based ethanol is already using a quarter or more of our national corn crop and there's a limit there. It will remain part of our motor fuel mix, but it isn't the answer on its own. And it has gotten this far with the help of some generous government subsidies.


Long Island, NY: Steve

About a month ago an OPEC minister (he may have actually been the president) said that oil prices should be $150/barrel (when they were in the low $120s) and surprise the price of oil jumped $10 in one day.

In the equities market that would be called stock manipulation (albeit a short-term one) that brings about uncertainty in the market and economic distress to the users as a whole.

Specifically what controls are in place in regards to ensuring the oil market isn't manipulated a la the electricity market in CA a few years back?

Steven Mufson: The CFTC is investigating market manipulation now. How much people move markets depends on how much credibility markets place in them. It's a good question and hard to answer. I think you can ask the same question about Boone Pickens, who appears on cable TV making oil price predictions at the same time he is taking market positions on oil. For that matter, Goldman Sachs and other investment banks issue forecasts and they are market players too. Seems like a rich area for the CFTC, but I'm not sure I expect much from its inquiry.


Ogden, Utah: More of a comment than a question: People who say gasoline is cheaper in Saudi Arabia than the U.S. because of subsidies by the government need to remember that the US subsidizes the price of oil, albeit not so directly. The hundreds of billions of dollars we've spent on the wars in the middle east over the last 20 years or so are all a direct subsidy to keeping the oil flowing. Even before the current war, military spending in the region was more than the price of the oil we were buying there.

So, given that, Americans are already paying a lot more than $4 a gallon for gasoline.

Steven Mufson: Thanks for this comment.


Renewable resources: Is there considerable and valuable developement of renewable resources?

I read your comment about the Speaker of the House being for the environment, and I totally agree with her - and truly believe this is BEST for the citizens. And if there were renewable resources, something that we as a society have known about for YEARS, then oil wouldn't be such an issue, no?

Steven Mufson: Thanks for this. Renewable resources such as wind and solar can help generate electricity. This is helpful for climate change issues, but it will only help the oil situation if people start driving electric cars. A lot of people are working on that, but it's not a replacement at the moment. Pickens would use wind to replace gas-fired electricity and then use natural gas in cars. That also has a lot of logistical obstacles.


20009: Steven, My roommate, who works for the oil industry, and I were sitting around chatting about drilling and energy and transportation and he wanted to know why I was against drilling. Guided by his numbers on possible barrel output, we figured that if everything went perfectly AND we could increase refinery output at best we could introduce 2 million barrels of oil a day resulting in a $0.04/gal savings to the average consumer. I found out this morning that is pretty much what the DOE projected. Why aren't more people throwing around these numbers? If people saw the meager savings all the drilling would produce they might not be so quick on the drilling trigger.

Steven Mufson: How much you project savings to be for production that comes on line years from now is a tricky calculation. I try to be cautious about projections out that far. Yes, the DOE has made calculations of very modest benefits.


Boston, Mass.: What impact do countries like Mexico, Venezuela, and China who artificially keep gas prices low for their own people - what does that do to the market prices around the world.

Americans are deciding whether or not to give up their SUVs, but the Chinese are buying trucks and SUVs by the boatload...

Steven Mufson: Low gas prices encourage more consumption, just as low prices here in the U.S. contributed to the popularity of SUVs. It's important that those countries get rid of those subsidies to send the right price signals to their consumers. If they want to help poor people pay for fuel, it would probably be better to give them a tax break. Then they could use the money to buy fuel, or they could use the money for something else and cut back on fuel use as much as possible.


San Diego, Calif.: Sounds like a peak in daily supply is on the horizon, maybe in 2010-2012. What ramifications would this have?

Steven Mufson: I wouldn't want to put a date on peak production. (Matt Simmons thinks we're past it; others think it's still many years off.) There are many prospects still out there.

But even if the remaining oil is just harder to find and more expensive to produce, that has ramifications. I think the increase in inflation and huge flows of money to oil producing countries are some of the ramifications a peak in oil would have and we're getting a taste of that now.


Yakima, Wash.: How much of the increase in price at the pump is because of evaluation of the dollar?

Steven Mufson: The price of oil has increased in all currencies. But the weakness of the dollar has made it worse for the United States. It's probably added about 15 percent over the past couple of years, more if you go back to the year 2000.


Katy, Texas: Isn't the Strategic Petroleum Reserve's unmentioned but main reason for existience is to supply our military to open the taps in the Middle East were they to ever concieve of trying to shut us down?

Steven Mufson: Yes, the reserve was designed for a supply disruption, not to manage prices.


Alexandria, Va.: I've heard that most U.S. oil companies have large swaths of land that haven't been drilled. Why are they not drilling? Couldn't the construction of new domestic refineries drasitcally reduce our depence on foreign oil and thus drop price? Whats stopping it?

Steven Mufson: Oil companies always have prospects that they are not drilling at this particular moment. That is natural given that they are planning drilling programs into the future. There are times when they could be drilling more. Ten years ago was one of those times, but low prices encouraged them to cut back on drilling then. That has contributed somewhat to our supply situation now.

I'm glad you asked about refineries. There has been a lot of refinery capacity added here in the US through expansion and upgrading of existing refineries. We don't need to build new refineries from scratch. But we do need more refineries that can use low quality crude oils and which can produce a variety of products when consumption patterns change, such as the increase in diesel use over the past few years.


Steven Mufson: Thanks so much for all your questions. I hope the answers were helpful. I need to run to a meeting now. If I can, I'll come back to some of the remaining questions later and post a few more replies. That will depend a bit on what news there is.

Thanks again and thanks for reading the Post.


Rockville, Md.: My opinion is to support ethanol from cellulose, but not from corn. But the Post does not seem to pay attention to the difference. In fact, there were a few articles two years ago about burning corn for heat. What is going on?

Steven Mufson: The Post does pay attention to the difference. According to new figures, the nation's distilleries produced 598,000 barrels a day of corn-based ethanol in May. It did not produce any commercial volumes of cellulosic-based ethanol. Everyone agrees that cellulosic based ethanol is key to the future of ethanol, but people are still working to scale up pilot plants and to make it more economically viable.

Here is a piece on the problems with corn-based ethanol

Here is a piece on one of the efforts to commercialize cellulosic ethanol


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