Editor’s note: This is the first in a two-part series about factors that influence oil prices.
The age old question about gas prices doesn’t have a simple answer. The amount you pay at the pump is influenced by classic economic concepts of supply and demand, as well as other factors like the difficulty of maintaining old refineries or opening new ones. Other issues that affect oil prices are international conflict and debate about ethics and the environment.
International problems
If you have been paying attention to international news at all within the past year, it is certain that you have heard about the ‘Arab Spring’ movement in the Middle East. The rebellion that started because a man immolated himself in Tunisia in response to oppressive government rule has swept across the Middle East. The oil supply is more uncertain because of government instability in the region.
The U.S. is very dependent on foreign oil. Sixteen percent of U.S. oil comes from the Persian Gulf, according to Consumer Energy Report. The main countries in the Persian Gulf where the U.S. obtains its oil are Saudia Arabia, Yemen and Iraq. On a side note, 21 percent of U.S. oil comes from Africa. Nigeria and Algeria are among those nations in Africa that are major oil producers. Unfortunately, some African nations do not have much stability at the moment either. There are frequent clashes between Hausa-speaking Muslims and Christian members of other ethnic groups in several Nigerian cities such as Jos. The most recent was on Feb. 6 when a suicide bomber from the radical Islamic group Boko Haram targeted a church in Jos. Nigeria experiences frequent strikes as well. According to the BBC, many poverty-stricken Nigerians see the country’s subsidized fuel as the only benefit they get from their country’s oil wealth. (Gas costs around $0.80.) Such unrest in western African countries causes pipeline disruptions.
The conflict with Iran is not recent news. The country has had nuclear ambitions since 2004. Tehran claims its nuclear program is purely for peaceful purposes (i.e. energy use) while the West believes Iran may also be trying to develop nuclear weapons. Whether Iran is trying to develop weapons or not is uncertain. Recently this year, tensions rose as Iran progressed further with nuclear aspirations. It may come as a surprise to many that Iran is the world’s fourth largest oil producer. You can bet Tehran’s decisions affect the oil market. Iran has been struggling to sell its crude due to a combination of tough U.S. sanctions and an EU embargo that begins this July. Recent sanctions come as a result that Iran continues to pursue nuclear ambitions. As new sanctions by the U.S. were recently passed against Tehran in order to try to hinder the country’s nuclear ambitions and the EU has announced a ban on importing Iranian oil, Iran threatening to close the Strait of Hormuz. The strait is a major naval shipping lane for oil in the Middle East.
Oil prices were already up in early March due to a few of the factors I just mentioned. On March 1, an Iranian news report claimed that a pipeline exploded in the Saudi Arabian city of Awamiyah. The news report stated the pipeline destroyed was one of “the pipelines feeding one of the most important oil hubs in the world.” Oil prices promptly surged nearly 5 percent. The next day, Saudi Arabia denied these claims, after which oil futures dropped. It is unclear why Iran reported the false pipeline incident. Saudi Arabia and Iran are not best friends; their relationship can be described as ‘hazy’ at best. This instance alone can nearly show how volatile oil prices are.
Ethical controversy and environmental regulations
Domestically, the Keystone Pipeline XL faces challenges. The pipeline system is designed to transport oil from northeastern Alberta, Canada down to the Gulf Coast of Texas with connections at different oil refineries along the way. The proposed pipeline has faced lawsuits from oil refineries and environmentalists alike. In November 2011, President Obama postponed the decision until 2013. If built, the pipeline is expected to be placed over a previous pipeline. Regardless of your beliefs about whether the pipeline should be built or not, the fact that it was not built might adversely affect the oil price in the coming months as the U.S. faces an oil supply issue.
The U.S. has strict environmental guidelines when compared with other countries. While I am not opposed to the EPA, its regulations add expense to our fuels. The atmosphere to an extent is cleaner, but unfortunately, tough rules on greenhouse gas emissions and pollution standards have a cost. According to the EPA report “The Benefits and Costs of the Clean Air Act from 1990 to 2020,” the cost of the Act’s air quality improvements will “reach almost $2 trillion for the year [of 2011], a value which vastly exceeds the cost of efforts to comply with the requirements of the 1990 Clean Air Act Amendments.”
Relief may or may not be on the way. There are several arguments on both sides. High oil prices are not favorable for an incumbent administration especially in a presidential election year. High oil prices hinder economic growth and only aggravate the electorate. The election year could increase the probability of releasing oil from the Strategic Oil Reserve. It is also quite possible that as we move toward summer, demand for oil will be less, even though demand has been reasonably low already due to a warmer winter. If tensions about Iran do not flare up and the region does not become any more volatile, oil prices may be to lower levels by August. If the planned refineries also open, oil prices may drop even further. On the other hand, since a series of refinery closures have happened along the eastern U.S. coast, the country might be short of 160,000 bpd (barrels per day) of gasoline in 2012. This could drive oil prices even higher this year.