In recent months, we have been beset by one crisis after another. Covid, the attempt to overturn democracy at the nation’s capital, inflation, Putin’s attack on Ukraine, and now, rising oil prices. The last of these has been the most difficult to grasp, but it is clearly more complicated than simply a result of the war in Ukraine. Prices were rising before that invasion, and the U.S. only imports about 7% of our oil from Russia (after the recent sanctions, we now get no oil from them). Only an idiot would suggest that it is all Trump’s fault or all Biden’s fault, yet I have heard that reasoning from the left or the right, respectively. The question remains, if we don’t get oil from Russia, why are gas prices so high? The more complex explanation is “Market Forces,” but it also helps to look at the history of oil production and how that affects us even today.
Oil was first turned into a useful product in the mid-to-late 1800s. Even before automobiles and electricity, it was used for lubrication of machines and kerosene for lamps. John D. Rockefeller figured out that there was no real money in drilling for oil, as that end of the business was a crapshoot, and wells ran dry, as happened in our first oil fields in Pennsylvania, Ohio, and Indiana. Instead, he focused on the refining end of the industry, because all crude petroleum, regardless of where it came from, was useless until impurities were removed and it was turned into a finished product such as gasoline, grease, kerosene, diesel or jet fuel. Rockefeller bought out his rivals or forced them out of business with ruthless business practices that made him the hated symbol of Robber Baron rapaciousness in that era. By 1890, he controlled 90% of all of the refineries in the world.
In the early 1900s, oil was discovered in other places around the world, but production in Texas and Oklahoma topped the industry. Later, even huge oil fields in the Middle East and Indonesia were dominated by the West, especially the US, Great Britain (BP, or British Petroleum), and Holland (Shell Oil). With the advent of the family car and motorized militaries, the demand for gasoline skyrocketed. In fact, had the gas-starved Nazis conquered the USSR in WWII and taken over their oil fields, the war could have turned out very differently.
The big turning point in petroleum as a geopolitical factor came in 1960. Before that, gasoline was plentiful in the US and cheap. People my age can recall filling a gallon gas can for their lawnmowers for a quarter. The price fluctuated, but generally stayed between 25 and 35 cents a gallon for many years. We pumped as much oil from the ground as possible—until those supplies in Texas and other US states began to run out. Then we bought oil (at low prices) from other places around the world. In 1960, however, those other nations that produced oil grew tired of seeing all of the profits from their vast oil fields going to Western corporations. Five countries, Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela created OPEC, the Organization of Petroleum Exporting Countries. Other nations from the Middle East (ME), Africa, and South America later joined. Today, the 13 OPEC nations control 44% of the world’s oil production and 81% of its oil reserves.
OPEC did not really flex its muscles until 1973. In that year, war broke out between Israel and Egypt (known as the Yom Kippur or October War). Since the Six-Day War of 1967, the Soviet Union had supported Egypt in that continuing Middle Eastern conflict, and in response, it being the Cold War and all, the US automatically supported Israel. The Muslim, ME members of OPEC wanted to rid their region of the Jewish State of Israel, so they struck back at the US by issuing an Oil Embargo, in which they cut off all supplies of oil to the US. By this point, the US was heavily dependent on ME oil and a genuine oil crisis hit the country for the first time. The embargo soon ended, but OPEC exercised its newfound power by employing the basic principles of supply and demand to their favor. They controlled the amount of oil they produced each month by turning the spigots on or off. In that way, they could artificially raise or lower the price of gasoline when they wanted. Gasoline prices quadrupled overnight, to over a dollar a gallon. Plus, inflation hit us hard, because every product we consumed was transported by planes, trains, ships, and trucks that used some form of petroleum fuel. We experienced gas shortages at several times, and, for the first time, realized that our dependency on fossil fuels was a real problem.
Since the 1970s, gas prices have fluctuated with world events, ME conflicts, natural disasters such as Katrina in 2005, or just because of the whims of OPEC and their allies (of which Russia is one). Americans become concerned during times of high prices and purchase fuel-efficient cars, but as soon as the crisis passes, they go back to huge, gas guzzling SUVs and assume we will never run out of fossil fuels. My favorites are the massive pick-up trucks designed for heavy farm work, but which are purchased by suburbanites who apparently plan to haul a cruise ship over the Rocky Mountains. Car manufacturers have worked to make cars lighter and more fuel efficient, and the results have been good. Electric cars such as Tesla are here, but prohibitively expensive at the moment. A mid-sized, four-door auto in 1970 got fewer than 10 miles per gallon of gas. By 1990, that was up to 20 MPG. On our recent trip through 13 states, our 2018 Toyota Camry hybrid clocked in at 47 MPG.
The solution offered for high prices or shortages is always, “Drill, baby, drill.” The problem, of course, is transporting the oil once it is pumped from the ground. The Exxon Valdez disaster of 1989, the BP oil spill of 2010, and the numerous accidents involving pipelines from Alaska or Canada stand as cautionary tales involving permanent environmental damage. Fracking, or the practice of extracting oil that is trapped between layers of sediment is fraught with similar problems.
Back to that issue of supply and demand. When Covid hit in 2020, and people stayed at home rather than driving to work or vacations, demand for oil plummeted. OPEC countries, Russia, and American corporations all slashed production in order to keep prices high and protect profit margins. In the past year, though, we have had the greatest job increases in our history and the strongest economic growth since 1984. These factors, coupled with a pent-up desire for travel, have led to an increasing demand for oil. When Covid subsided and oil companies tried to ratchet production back up, however, they ran into the same problems that have plagued all other businesses and caused such sharp inflation: labor shortages and supply-line bottlenecks. The people and equipment they need simply are not available. Further, oil companies do not want to drill more. They are under pressure from Wall Street and stockholders to pay higher dividends, not spend money on drilling. Finally, the US companies have been closing refineries, rather than repairing or upgrading them, so there is less refining capacity than there used to be. This means that there has been high demand for oil, even before Russia was cut off, while supplies are low. In short, this is a recipe for high gasoline prices. And, of course, inflation in the prices of everything else is closely tied to fuel increases, since everything we eat, wear, drink, or otherwise consume gets to us in some form of transportation paying those higher gas prices.
All of this is by way of explaining that the owner of Swede’s Gas Station on the corner has little to say about the price you pay at the pump. Surprisingly, neither does Chevron, Shell, BP, or other corporate giants. Europe uses 60% of Russia’s oil, and China uses 20%. Most of the oil pumped from the ground in Russia may not come to the US, but it does affect the price of gasoline around the world. World commodity markets and the laws of supply and demand set oil prices based on a lot of complex factors. So, the next time someone next to you at the bar, or a dimwitted TV personality tells you that high prices for gas are the fault of one person or one political party, just shrug and say, “Oils well that ends well.”