Rising Oil & Gas Prices are putting many American’s finances and vacation plans on the ropes. The housing industry, already hammered by the subprime meltdown, tighter lending standards and soaring foreclosure rates, is taking more abuse from unemployment and higher gas prices.

Summer is here and many people are having to rethink their vacation plans.

"Anybody who wants to drive their motor home up to Alaska better do it now while the supply of oil is cheap," says veteran oil geologist L.F. "Buzz" Ivanhoe. "It's not a joke. I hope I'm wrong as hell, but I fear that I'm not."

What’s interesting about this quote is that it is dated August 31, 1998 when gas hit $1.31 a gallon. It’s deja-vu all over again as Yogi Berra would say.

Here’s an interesting email from my cousin who works in the oil industry:

In light of current topics in the news I offer a few comments below and the attached sketch of the current status of worldwide crude supply. 
 
Regardless of who or how speculation has contributed to the abrupt rise in prices, the situation would not be ripe for such shenanigans if supply/demand were not so tight.  In the big picture, the noise about where US refineries source their oil makes little difference.  The market is global and pricing very liquid.  If you don't get it from Region A (Middle East) then you get it from Region B (Latin America) and someone else gets it from Region A for the same price (assuming same quality).  On the same token, if Hugo threatens to boycott shipments to the US he'll have to eat it because we have the only nearby refineries capable of handling the mostly heavy Venezuelan crude in the required volumes. 
 
To create the composite picture in the sketch, data was drawn form three sources:  Energy Information Administration, World Oil (a trade publication), and the CIA.
 
Salient points of the sketch include:
 
-  The Arab Gulf States control 65% of known crude oil proven reserves.  They hold the best hand in this game.
 
-  All of OPEC controls 79% of known proven reserves.
 
-  The US has about 2% of known proven reserves.
 
-  The US supplies 9% of the volume to the daily market and consumes 26% of daily supply.
 
-  US refineries procure about 12% of their crude supply from the Gulf States (not shown on the sketch)

 
A few issues:
 
1.  The long term issue is that the Gulf State kingdoms hold the key to the energy treasury.  They can fine tune their drilling and production rates as they see fit to extract the maximum umbrage from the users.  We will always be behind the curve with this arrangement as it plays out over the next 30 to 50 years.  Some think that Saudi Arabia will be unable to sustain production at their projected 12.5 mm bopd rate advertised for next year.  In other words, they will have reached "peak oil production" within their own reservoir base.  If so, that will worsen the price problem in the near future.
 
2.  The rest of the world is a bit perplexed that, in spite of its heavy consumption, the US has set considerable territory off limits to oil and gas development and chooses, instead, to rely on foreign sources because of low tolerance for environmental risk.  However, this smells of environmental imperialism - we ask the other producing countries to risk their environments on our behalf. 
 
3.  That said, the US will not be energy independent in our lifetime no matter what any politician or media talking head promotes regarding domestic oil production.  We passed that milestone decades ago.  However, there are a number of options that, when combined, can lessen the energy "trade gap" such as: develop more oil and gas domestically, build more nukes, develop more geothermal facilities, dig up tar sands, dig up oil shale, dig up coal, install a zillion windmills, install a zillion solar cells, drive smaller more efficient cars, build energy efficient structures, use better light bulbs, etc.  There is no silver bullet solution.  We will need to press all options to keep our standard of living from slipping away and prevent degradation of our economy.  An important bonus is that money spent on energy extracted or produced here remains within our own economy rather than ending up in someone's else's National Bank.
 
4.  The so called "hydrogen solution" is a non-starter.  It burns clean, but you must expend as much energy to tear molecules apart to create hydrogen as you get when you combust it in an engine.  It works well economically only if the initial energy is free or very low cost.  Extraction of free hydrogen from the atmosphere is also a non-starter - the cost of extraction in energy and dollars far exceeds its economic value.
 
5.  The bio-fuel option is attractive in some versions, however it eats up acreage that could be dedicated to other crops, or causes more untilled land to be torn up - both of which extract their costs in the food market or the environment.
 
5.  A piece of trivia:  Although Exxon is the largest US oil company by far, it is more properly termed Medium Oil than Big Oil.  That's because it is only the 14th largest oil company world-wide - the largest being Saudi Aramco, Kuwait Gulf Oil Co, Lukoil (Russia), etc., etc. The national oil companies have direct control and ownership of their reserves, whereas the US majors only control portions of their US reserves, and must reach contractual arrangements with foreign national oil companies to produce and export crude.  These deals are frequently terminated at the whim of the foreign gov't.  A tenuous existence.
 
Hope this clarifies some of the murk surrounding recent media hyperbole.

Greg McFadden
Chevron Corporate HES
OE Review Advisor