Discussion:

1. Supply and demand for petroleum:

The nation’s capacity to refine oil has very nearly reached its capacity maximum. If demand for oil and gasoline continues to increase with increases in population, automobiles and trucks, along with an economic recovery in the U.S., a major shortage of liquid fuels may occur within the next two to three years. As this phenomenon occurs the price for liquid fuels will continue to rise.

Refinery capacity is only one of the problems that may occur. Building new refineries or expanding existing refineries might provide some relief to a potential supply and demand imbalance, but it will also create an even greater negative trade imbalance and may not result in a readjustment in the price of these fuels.

In the not very distant past, the U.S. was the world’s major consumer of liquid petroleum with many countries supplying to our ever increasing demand. One of the results of the collapse of the Soviet Union has been the expansion of the economies of many of the former Soviet States. Very recently the European Union expanded by 14 countries. This event will create a modernization and expansion of all of these economies along with an increased demand for liquid petroleum.

The economies in the far-east including Japan, India, Pakistan and China continue to grow at a very rapid rate. As these economies expand their needs for liquid fuels continue to grow. The combined populations of these Asian countries is much greater than all of the other “developed” countries. Therefore, as these economies expand the need for liquid fuels will expand at a much greater rate than most developed nations.

Many of the economies in the western hemisphere are also expanding rapidly. Mexico and the Central American countries are experiencing rapid growth in their economies. With these expansions, the need for liquid fuels continues to grow.

The result of the modernization of all of these nations will place almost unbearable pressure on the oil supplies in the world. Therefore, it is reasonable to conclude that over the long-term, expanding liquid fuel refining capacity in the U.S. and allowing consumption to increase without some form of tempering will only result in increasing prices for oil and gasoline.

It is probably time for the oil companies to take a look at this situation and propose solutions that don’t require expansion of the refinery capacity or massive increases in demand for liquid fuels. Otherwise, the oil companies may, at some time in the future, be accused of “Killing the goose that laid the golden eggs.” Obviously, it is not only the U.S. economy that will be stopped when petroleum prices continue to rise, it will be the economies of many nations that will begin to suffer and slow down.

OPEC has said publicly that they feel a price of between $25/bbl and $28/bbl is reasonable, but the price has risen above that level and does not appear to have any market pressure to soften. Building additional refineries in the U.S. certainly would not decrease demand for oil. OPEC would probably be happy if the price could be brought down since higher prices stimulate exploration and development of new oil supplies, many of which are not under the control of OPEC. These newer and more difficult supply sources need prices that are closer to $40/bbl to be economically developed. Therefore, OPEC tends to exert greater market power at somewhat lower prices. Unfortunately, increasing demand may make the higher prices a permanent condition for the world.

2. Natural Gas supply and demand:

Natural gas production in the U.S. and Canada has been declining. This is due in part to a reduction in drilling activities but it is, in large part, due to the exhaustion of the domestic supplies of currently produced natural gas. There are significant supplies of natural gas along both coasts and in the Gulf of Mexico. Many of these potential sites have been placed “Off-Limits” by both the Federal and State governments because of public pressure related to environmental impacts. As technologies improve, the potential environmental impacts decline therefore, it is reasonable to re-visit the development of these resources periodically to determine if they can be economically and environmentally developed.

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