This Memorial Day weekend gasoline prices are at a record high.  Though gas may decline a bit from time to time, the longer trends are not encouraging.  The price will be going higher.  Even if there is nation-wide gas rationing, $10 per gallon is a real possibility in the next few years.

The fundamental problem is that the United States is producing less and less oil, consuming ever more of it, and importing more and more to make up the difference.  The latest information released by the U.S.Department of Energy for the week ending May 18, 2007 shows that the United States produced just 28% of the petroleum it consumed.  This means that it is the world market which largely controls the price of gasoline.  In this same market the United States is competing against Europe, China, and the rest of the world for what is available.

In the week ending May 18, the United States produced 5.2 million barrels of crude oil a day.  This sounds like a lot, but the U.S. imported 14.5 million barrels per day of oil and oil products during the same period.  The amount of domestic production has been going down for years—2 years ago during the same period of May it was 5.5 million barrels per day, 5 years ago it was 5.9 million, and 15 years ago it was 7.2 million.  There was a decline due to the damage caused by Hurricanes Katrina and Rita, but most of that damage has now been fixed.

Also, imports have climbed.  2 years ago they were 13.6 million barrels per day of oil and oil products.  5 years ago the number was 12.1 million, and 15 years ago it was just 7.5 million.  There are variations, of course, from week to week and from month to month, but the overall trend is clear.

Of course, as has been widely reported by the media, consumption has been climbing, too.  We Americans are driving more and many of us are doing it in cars, trucks, and SUV’s that get lousy gas milage.

The high percentage of oil imports means that it is the world price of oil and gasoline that largely determines how much we pay per gallon.  Building more refineries in the U.S. won’t change the fact that those new refineries would have to operate using imported crude oil.  Either the U.S. will be importing gasoline coming from refineries in other countries or it will be importing crude oil for its own refineries.  Either way the U.S. will be dependent upon petroleum from other countries and be subject to the prices charged in the world market.

At 7 million barrels per day, China is the second largest consumer of oil next to the United States.  Its consumption is growing rapidly.  Unlike the United States, China produces most of the oil it consumes, but production is not keeping pace with consumption and China has to buy increasing amounts of oil in the world market.  Europe, taken as a whole, uses twice the oil as China and has to buy most of its oil in the world market.

And Europe has a big advantage over the U.S. because its currency, the euro, has gone up over 50% in value since 2000.  If China revalues its currency upwards to more accurately reflect its value, the U.S. will be at an even bigger disadvantage in the world oil markets.

Compounding the problem is the possibility that the world may be soon reaching the point of maximum production of oil.  The time at which this happens is called “peak oil.” Some maintain (see here and here) that this time will be happening soon.  Others, such as the U.S. Department of Energy, say that there will be enough until at least 2030.  But there is no dispute that much of the needed oil is in places where there is a large potential for supply disruptions, such as the Middle East and the West Coast of Africa.

Nation-wide rationing will not help the U.S. drivers because the large majority of the oil comes from foreign countries.  All it would do is help make more oil available for foreign drivers.  Drilling for oil in places that are currently off-limits, such as off-shore and the Artic National Wildlife Refuge, may slow, stop, or even somewhat reverse the decline in domestic production—for a while.  And even that assumes no more catastrophic hurricanes causing havoc to the off-shore oil production we currently have.  It looks as if the U.S. will continue to buy most of its oil in the world marketplace.

In conclusion, we should all be preparing for a future of ever-increasing gasoline prices.  More fuel-efficient cars will help, but if you will balk at paying $10 per gallon to fill your hybrid you should consider moving to where you are close to your job, shopping, school, and place of worship.  Ideally at least some of these destinations should be reachable by mass transit, if not by bicycling or walking.

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Here’s how the percentage of consumption that comes from domestic production was calculated.  As stated above, the U.S. imported 14.5 million barrels of oil and oil product per day in the week ending May 18.  Of that, 10.6 million barrels per day was crude oil.  The U.S. also imported 3.6 million barrels per day of finished product, that is, product that has alread been refined into gasoline, fuel oil, and others.

The U.S. exported 1.2 million barrels per day of crude oil and finished product—mostly finished product—during the period.  The amount stockpiled went up a little, but due to increased consumption the number of days supply was basically unchanged.  So one can estimate the consumption by adding the imports to the domestic production and subtracting the exports.  That gives 18.5 million barrels per day.  Dividing the U.S. domestic production of 5.2 million barrels per day by 18.5 million barrels per day yields 28%.

Each barrel of petroleum contains 42 gallons (a barrel may contain a different number of gallons if the product is different, for example wine, but in the oil industry a barrel contains 42 gallons).  A barrel of crude oil is distilled and “cracked” to yield different products.  The most desired product is gasoline.  A barrel of crude oil yields about half a barrel of gasoline, and the rest is made into other products.

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