Gasoline is made from crude oil. For the past century, we've taken the availability of crude oil for granted. The global oil industry actually started in Titusville, Pennsylvania, with the discovery of commercial quantities of oil in 1859 by Col. Edwin Drake.
In the early 20th century, even bigger deposits were found in Texas and Oklahoma, and soon after in California. And then there were even bigger discoveries in the Middle Eastern countries of Saudi Arabia, Iran, Iraq, Kuwait and others. The world was awash in oil, and hardly a thought was given to running out.
But the world didn't hold still, either. That cheap energy spawned tremendous industrial growth in North America and Europe. The more these regions grew, the more oil they needed. In the early days of this new century, a couple of new developments began to change the economics of oil.
First, Asia started on an enormous growth spurt. China, with 1.3 billion people, more than four times the population of the U.S. embarked an industrial expansion that rivaled the early manufacturing days in the U.S. India, with 1.1 billion people, began a similar expansion.
Factories, those consumers of energy, grew, as did wages, and a new consumerism was borne for the first time for a third of the world's population.
All that expansion and consumerism began to put a strain on the oil supply and distribution system that had never been seen before. The demand--the big demand--for oil grew to a global scale. China, with economic expansion of at least 10 percent in recent years, and little of its own oil, needed energy and wasn't shy about paying for it.
Production = Demand
In recent years, the demand for oil has marched right up to almost exactly equal the global production for oil. Both of those numbers are about 86 million barrels a day. And guess what? It takes refineries to process all that crude oil into products such as gasoline and heating oil. Well, total refinery capacity also happens to be about 86 million barrels a day.
So now, we have a global production and distribution system that is in a precarious kind of balance. Why not just produce more oil? Easier said than done. The Middle East countries, which hold about 60 percent of total world reserves of oil, are producing almost flat out. Only Saudi Arabia has the capacity to produce more, and they're investing billions of dollars to do that.
What about the U.S? Sorry. The U.S. produces only 8 percent of the world's oil, and production has been declining since 1970.
This isn't to say we're running out of oil. Far from it. I can talk about this another time. But our ability to find new reserves fast enough, and cheap enough, to keep up with global demand is being seriously strained.
And then there's conflict. Much of the world's oil comes from politically unstable regions. Oil from Nigeria, Africa's largest producer and the fourth largest supplier to the U.S., has almost been cut in half because of attacks on oil facilities by militants who want more government support. We all know about Iraq, holder of the world's third-largest reserves. Venezuela, the fifth-biggest supplier to the U.S. is under the control of Hugh Chavez, who has vowed to cut off all of his oil supplies to the U.S. You get the picture.
Any time there is unrest in a volatile country, and the oil supply is threatened, the financial markets grow very nervous and bid up the price of petroleum.
That's where we're at today. Massive global expansion outpacing new discoveries of oil. Civil and Political unrest in key oil-producing regions, tremendous demand from developing countries. The barrel of oil is crying, "Ouch!"
So, when will the price come down? Maybe no time soon. There's nothing on the immediate horizon to bring that price down, though in coming years, as more discoveries come on-line, that could relieve some of the pressure.
There isn't much our politicians can do. They make a lot of noise about passing laws to prevent price gouging at the pump, but that's not where the problem is. More on that later. The best thing we can do is to take matters into our own hands and conserve. The less energy we use, the less global demand will be pressured and the more money we'll save.
Sorry it isn't a rosier outlook, but it's good to know why.