People heat their homes and drive their cars using oil and gas products. But many people lack basic understanding about where these products originate. “We don’t know much about the energy we consume, where it comes from and the impact it has on our lifestyle,” says Thunderbird Professor Andrew Inkpen, Ph.D. Here is a quick primer to boost your “energy literacy.”
Q. Why do gasoline prices vary so much around the world?
A. Prices vary because of government intervention in the markets. Gas taxes in the United Kingdom make up more than 70 percent of the retail price, which means gas prices in 2009 are more than $6 a gallon. In the United States, taxes vary by state and represent about 25 percent of the retail price in 2009. In Venezuela the government caps the price of gasoline at about 16 cents a gallon.
Government intervention in the fuels market leads to some strange regulations. For example, customs officials check the fuel gauges of vehicles leaving Singapore and require that fuel tanks are at least three-quarters full, in order to limit the importation of lower-taxed fuel from Malaysia.
Q. How do fluctuating oil prices affect production and global supplies?
A. Falling oil prices mean reduced profitability for oil producers. High cost production areas, such as the tar sands of Alberta, where each barrel of oil produced costs about $50, will usually see a drop in production investment. Falling oil prices in the 1990s meant that many marginal producers went out of business, and other producers put projects on hold. As oil prices rise, more production comes on stream, although this can have the effect of increasing supply and driving prices back down.
Q. Besides gasoline and diesel, what other refinery products come from crude oil?
A. Gasoline is the most important refinery product in the United States, and diesel is the most important refinery product in Europe. Other products include heating oils; solvents; propane; butane; kerosene for jet engines and tractors; asphalt for roads and roofing materials; coke for things such as electrodes and charcoal briquettes; lubricating oil base stocks for motor oils, industrial greases, lubricants and cutting oils; petrochemicals used in the production of plastics, synthetic fibers, synthetic rubbers and other products; and residual fuels used by ships, power plants, commercial buildings and industrial facilities for heating and processing.
Q. A private individual or company can own an oilfield in the United States. How does this compare to other parts of the world?
A. In most parts of the world the government owns the resources in the ground. Companies that want access to these resources must work through governments.
Q. Where does the real power lie? With big oil companies, OPEC or other sovereign states?
A. As in any industry, competitive power will be held by those firms and entities that have scarce resources and knowledge. In the oil and gas business, there are various scarce resources: the oil and gas in the ground (the reserves), the technology to extract the oil and gas, the project management and logistics skills to manage the development and production of large-scale projects, and the people to lead the development and production teams. OPEC countries and other sovereign oil and gas producers have access to the hydrocarbon reserves but, in most cases, lack the technology, management skills and leadership to develop their reserves. Thus, the power is shared between sovereign states and the large oil companies. Both sides need each other.
Q. Why are oil and natural gas so closely linked together?
A. The production of oil and gas share many of the same technological and operational challenges. In the upstream part of the business, the exploration and drilling processes for oil and gas are similar. As a result, it is logical that the largest crude oil producers also have become large gas producers.
Q. What is the correlation between crude oil prices and gasoline prices that motorists pay at the pump?
A. Many people think crude oil prices drive gasoline prices, but it generally works the other direction. Crude oil prices rise and fall based on the expected value of end products such as gasoline and diesel and the available supplies of crude to meet the demand for those end products.
Reduced demand for refined products is the primary reason why crude prices have fallen so much over the past year. In 2008 global demand for all transportation fuels fell more than 7 percent. Producers of crude, and OPEC specifically, usually react by reducing production in an effort to restrict supply and drive crude prices up.