High Gas Prices — What is the Root Cause?

Gas prices have been steadily climbing for the past two months, and are threatening to become "the" story of the coming summer. The national average price for a gallon of unleaded regular gasoline now stands at $3.07, up a full $.25 from one month ago.

Many consumers have directed their ire at the "Big Oil" companies, who are all raking in huge profits from the high gas prices. However, in an industry as complex as the oil/gas business it is difficult to point to one determinative factor to point the finger at. Media commentators have run the gamut, from accusing oil companies of pure greed, to complaining about the lack of domestic oil refining capacity, to acknowledging that the supply of oil may be running short — although those who publicly assert the latter are distinctly in the minority, at least for the time being.

Aside from assigning blame for the situation, consumers all around the country are indeed concerned about the rising prices. In Texas, the average price of retail gasoline climbed for a 14th week. A weekly AAA-Texas gas price survey showed that price trends were mixed, with prices reaching record highs in some areas but falling in others. Auto club spokeswoman Rose Rougeau said that Texas cities Amarillo and El Paso recently set new record highs, while prices edged lower in eight other cities. Rougeau posited that strong consumer demand, reduced domestic output because of refinery problems and lower gas imports were apparently combining to keep prices high.

In nearby Arizona, gas prices have also risen for 14 week in a row. According to AAA-Arizona, the current statewide average for a gallon of self-serve unleaded regular is $3.09 per gallon. That's a penny below last summer's highest price, and getting closer to the all-time record of $3.13 per gallon set in September 2005.

Figures from GasBuddy.com, a Web site that reports detailed gas price data from across the country, indicate a definite disparity between the lowest and highest price. Links in the following price charts have been included to the CityBook.com Online Yellow Pages reference page for each noted city and state:

10 lowest prices, by state:

10 lowest prices, by city:

10 highest prices, by state:

10 highest prices, by city:

Getting back to theories of why prices keep going higher, the lack of oil refining capacity seems to be the most popular response. More than a few industry experts blame Congress, asserting that the legislative body is preoccupied with forcing auto companies to meet unrealistic targets for fuel efficiency, while failing to address the oil refining problem. On May 8, the Senate Commerce Committee voted raise fuel economy standards to an average of 35 miles per gallon in 2020 for cars and light trucks, with standards rising by 4 percent annually until 2030.

According to some experts, Congress has discouraged the construction of new oil refining capacity through proposed legislation that punishes refiners when prices rise, that gives extensive and expensive permit requirements for construction of new refineries and expansion at existing sites, and that allows for a degree of tort risk.

Building more refineries would certainly alleviate the problem of supply, but because they have the capacity to be so damaging to the surrounding environment, it is very difficult to find a community that will approve of a new refinery. Under the logic of "NIMBY" (Not In My Backyard), people like to fill cars up at low prices, but they don't want a refinery close to home.

As previously noted, the theorem that the steady rise in gas prices is due to declining stores of oil on a global basis boasts the fewest prominent proponents. Acknowledging that the world's oil might be running out seems to be an anathema to leading politicians and industry executives alike.

However, there is a growing number of observers who feel that it indeed might be the case. Those who are of this persuasion point to the state of affairs in Saudi Arabia, the top oil producer for the past three decades. It has been rumored for years that its largest oil field, Ghawar, is in permanent decline.

For those who don't know much about Ghawar it is by far the largest conventional oil field in the world, measuring an estimated 175 miles by 20 miles. Currently, the huge field is said to produce between 4.5 and 5 million barrels of oil per day by outside observers, which is over 6 percent of global production. The officially stated maximum sustained crude production capacity is 8.5 million barrels per day, though actual daily output is a closely-guarded state secret. Thus far, approximately 60 billion barrels have been pumped out of Ghawar since production began back in 1951.

Ghawar's total proven reserves, or recoverable oil still left in the ground, have been pegged at just over 70 billion barrels by Saudi Aramco, the nationalized oil company which is the largest of its type in the world. The word "recoverable" is particularly important, as the gross amount of oil in the ground is less significant than the amount that can easily be harvested at a given level of extractive technology. While modern techniques can certainly boost the amount of oil that can be extracted per oil field, the question of how expensive the operation turns out to be is extremely pertinent. Once oil extraction becomes too difficult, and therefore excessively expensive, it becomes economically infeasible to attempt to remove the remaining supply.

Saudi Arabia comes under particular scrutiny because of its importance in the global oil markets. It has long held the mantle as the world's biggest producer of oil, and has acted as a "swing producer," increasing and reducing oil extraction rates to balance to the worldwide market in concert with the other nations in the Organization of Petroleum Exporting Countries (OPEC).

Worryingly, a recent indication suggests that Ghawar might be in permanent decline. In April 2006 a Saudi Aramco spokesman, in a major admission, stated that its mature fields were declining at a rate of 8 percent per year. This, of course, implies that Ghawar may have "peaked." The spokesman went on to say that measures were being taken to offset the decline, but that the only true solution to declining oil supplies was to locate new fields. It is beyond debate that new discoveries have not kept pace with growing global demand.

If Ghawar is indeed in decline, it likely means that the entire world is as well. Of the four oil "super-giant" oil fields, three are officially in decline: Mexico's Cantarell; Russia's Samotlor; and Kuwait's Burgan. Thought Ghawar has not "officially" been so declared, the implications of the above spokesman's statement are clear.

Time will tell who is ultimately proven correct in the ongoing debate about the root cause of the current high gas prices. If the problem lies in the lack of refining capacity, then an effective remedy is obvious. However, if "Peak Oil" is the true reason, then alternative fuels will have to be developed to the point where they can successfully bridge the inevitable gap in available supply.