Chuck McConnell: Don't blame Big Oil for gas prices

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The $4 price pinnacle for gasoline might arrive in Steamboat Springs sooner than you think -- maybe this summer.

The mere thought of $4 gasoline makes me angry and confused. But even worse, I don't know at whom to be mad.

When I listen to the national news and our elected officials in Washington, my dilemma is easily resolved -- hate the biggest target around, the multinational oil companies. The pundits have been effective -- 60 percent of the American public blame Big Oil for high gas prices. But let's look at the facts.

First, "Big Oil" is big. Exxon Mobil earned a $10 billion profit two quarters ago and $8 billion in the quarter just ended. But big not only is not bad, in this case, big is absolutely essential to our gasoline supply.

The crude oil and gas that was easy to recover and literally came "bubbling" to the surface has all been found and used long ago. To replace crude and natural gas reserves today, Big Oil drills 6,000-foot deep wells in some of the harshest locations in the world, such as the unforgiving North Sea and the hurricane-plagued Gulf of Mexico. Costs of the drilling and production platforms can approach $1 billion -- and these investments will not even keep U.S. production at a level to match our consumption. Plus, U.S. gasoline refining capacity is inadequate because permitting requirements make new refineries impossible at any cost.

Contrary to the beliefs and actions of most Americans, the supply of oil and gas is a finite and diminishing resource. The world will run out of oil and natural gas in the distant future. But long before this inevitability today's $73-a-barrel price will look very, very cheap. If that forecast does not concern you because it is so far in the future, picture the price of gasoline rising to more than $5 a gallon if Iran carries out threats its leaders made in January to block the Straits of Hormuz, where a quarter of the world's crude passes every day.

The U.S. imports two-thirds of its gasoline and crude oil needs today. Countries such as Nigeria, Venezuela, Saudi Arabia, Libya, Iraq, Iran, Russia and Oman are primary sources of world crude supply. Supply and demand determine the price of crude oil. Gasoline is made directly from crude oil.

These countries (and, yes, Big Oil) are enjoying selling their oil and gas production at a price more than double just two years ago. How could the price double in such a short time? The answer is a simple supply-and-demand equation. Rapid economic development of Brazil, Russia, India and China have escalated world energy demand. The world consumes 84 million barrels of oil each day, and world production capacity is 85 million barrels a day. New oil and gas discovery cannot meet this demand. So, a combination of fear and real shortage has driven prices up.

There are 42 gallons in a barrel, so at $73 a barrel for crude, every gallon of gasoline extracted costs $1.74 -- that is for the raw material alone. (Two years ago, this component of gasoline cost was 85 cents per gallon less.) Making clean gasoline from sticky, smelly crude oil is a complicated process requiring expensive equipment and costing about 10 cents a gallon. Colorado and federal taxes add more than 40 cents per gallon. Add about 5 cents for transporting the gasoline from the refinery to our local gas station and the total cost for taking a gallon of gasoline from the bottom of a hole somewhere in the world to your tank is $2.29. The difference between $2.29 and the posted price (now about $2.79) is the margin the refiner, distributor and local dealer must make to stay in business.

Very expensive crude oil, therefore, is to blame for the skyrocketing gasoline prices and the likelihood of $4 a gallon gasoline. And the very expensive crude oil can be traced directly to a lack of U.S. and world energy planning. Yes, and we consumers also share in the blame since we have not taken the real threat of depleting oil supply seriously.

The answer is easy to say and apparently impossible to do. We must aggressively exploit all possible domestic coal and hydrocarbon resources (that includes the Arctic National Wildlife Reserve -- ANWAR), but only to bridge our energy demands until a totally renewable energy society is possible. The supply of sun energy, wind power and hydro-electricity is nearly endless and these sources must be developed, beginning now, at any cost.

What we lack in America is the political courage and leadership to accomplish this absolutely critical task.

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