Civics 101: Oil & the Price of Gas
Welcome to Civics 101! This month we’ll tackle an area of significant interest: Oil & the Price of Gas
Did you know that our national maximum speed limit of 55 MPH came about because of an oil war?
In 1973, a coalition of Arab oil countries (called OAPEC - more on this later) created a petroleum embargo - they refused to sell oil to countries that supported Israel (a.k.a the Yom Kippur War of 1973). This embargo included the United States, and it devastated the country. Gas was extremely expensive and in super low supply. President Nixon established price controls on domestic oil, gas was banned on weekends and it was rationed nationally based on the number on your license plate. Congress was forced to create the 55 mile per hour speed limit on federal highways, because you save gas when you drive slower. So, the speed limit’s purpose was never about safety, but solely to control gas consumption!
Some basics:
How much oil does Colorado produce? Colorado accounts for 4% of U.S. total crude oil production and 3% of our strategic petroleum reserve (more on what this is later below).
What is oil and how is it used? Originating 300 million years ago from fossilized organic material, oil is a fossil fuel formed by heat and pressure over hundreds of thousands of years. It is used as raw material that can be refined into a number of different plastic or liquid fuels such as gasoline and diesel.
What is gasoline and how is it used? Gasoline is a finished product made from refining crude oil; it is a transparent, flammable liquid that is used as a fuel in combustible engines such as those used by vehicles.
How much is oil consumed and what are the negative impacts ? Oil makes up 88% of the world’s energy demands. Oil is used so much that experts predict levels may be completely depleted in 47 years.
Drilling produces 24/7 generation of pollution, disrupting wildlife and damaging public lands. We must transition to responsible renewable energy to preserve our environment and communities.
Weld County produces 9 out of 10 of all barrels produced in Colorado; and most new oil production comes from the Niobrara Shale formation located in its Denver-Julesburg Basin.
What about Westminster?
Fuel costs for the City of Westminster’s fleet are actually pre-purchased on a fixed-cost basis with Hill Petroleum which keeps our supply and costs steady. We paid $950,000 for 220,000 gallons of unleaded and 120,000 gallons of diesel. The week of March 7, the City paid $2.7403 per gallon for unleaded gasoline and $2.903 for diesel.
Westminster does not have any active oil and gas wells. The last active well, near Saint Anthony’s North Hospital Campus, was shut down in 2020. In 2019, Governor Polis changed the way the Colorado regulates its oil and natural gas industry by giving counties and municipalities increased regulatory authority over oil and natural gas development in their jurisdictions. So, unfortunately, there is still potential for drilling within Westminster’s municipal limits because the city is located within both the Niobrara and Denver Oil and Gas Basins.
What’s the deal with gas prices?
You have probably heard someone blame a politician for the rise of gas prices. This is not correct and based off of disinformation and a lack of understanding of how gas prices work.
There are actions a president can take to possibly reduce gas prices, but gas prices do not fluctuate based on the actions of our government. So, what’s the real story? One word: Oil. The price of gas mirrors the price of oil which is set by the global market.
First, let’s quickly talk about 2 organizations:
OPEC (Organization of the Petroleum Exporting Countries). This is basically a group of countries that produce a majority of the world’s oil, and they agree on prices and production to ensure a stable global market that doesn’t run out of oil. There are 13 member countries: Algeria, Angola, Republic of Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE, and Venezuela.
OAPEC (Organization of Arab Petroleum Exporting Countries). 11 member countries: Algeria, Bahrain, Egypt, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, Syria, UAE, and Tunisia.
You’re an oil expert now. So, how is it that the average gas price in Colorado has risen to $3.97? Here is the sequence of events:
Pandemic hit and started to heat up in mid-March 2020
Saudi Arabia and Russia started a price war: first, OPEC cut oil production to keep prices high, but Russia refused to match or follow suit; then SA cut its export prices by 10%
As oil prices dropped dramatically, investors of oil futures (a method of speculating on the price of oil) got crushed. It caused marginal producers to shut down or go bankrupt
The pandemic caused demand for oil to return back to normal levels, but production was still super low and couldn’t catch up (because many producers no longer existed)
Given this high demand and low supply, oil prices skyrocketed and gas prices followed. Russia’s invasion of Ukraine further contributed to the high demand and low supply.
The end. That’s the primary reason. No conspiracy. Fun fact: the price of oil is actually decreasing but the price of gas remains high due solely to price-gouging gas companies.
There are 3 actions, though, that government can actually do to potentially lower gas prices:
President Biden can (and plans to) release oil from the strategic petroleum reserve. This will lower prices a tiny little bit (not sarcasm). The strategic petroleum reserve is a system of caverns (huge underground salt domes full of oil) along the gulf coast that can hold 714 million barrels of crude. It was created in 1975 in response to the oil embargo (from the crazy story I told you earlier about the 55 MPH speed limit)! Fun note: Congress has been selling the oil in the reserves since 2015 to fund our national deficit (see #2 below).
Biden actually released 50 million barrels from it in November 2021. But the entire United States uses more crude than that in a SINGLE DAY.
Ban exports: stop selling oil that we produce to other countries. We actually did this for 40 years until 2015 when President Obama agreed to end that ban. Before he stopped the ban, what was going on was that fracking (a method of extracting oil and natural gas from deep underground) had increased oil supply, but all of that needed to get processed through domestic refineries which depressed the price of oil. The problem here is that there was never a ban on finished products (e.g. gas), so the refineries were exporting the gas they made from that oil causing them to make billions of dollars but resulting in zero impact to prices inside the country. So, banning oil exports can make some impact if we also ban finished products, too. Another problem is that this would also lead to retaliation from other countries against the U.S., cutting us off from the global supply of oil.
Cut taxes: cut the federal tax of 18 cents per gallon of gas, and cut the (even bigger) state gas taxes levied across the country.
Did President Biden’s decision to cancel the Keystone pipeline raise gas prices?
No, no, and no. The Keystone Pipeline was a proposed project that would transport oil from Canada to Texas. The project was protested for many years (spanning 3 presidential administrations) by indigenous activists, landowners, and environmental groups. Project was abandoned in June 2021 when President Biden issued an Executive Order to ban the permit for it.
The supply of oil from the Keystone pipeline would not have been activated for many years. It has no influence on why crude oil prices have increased since April 2020, because short-term factors increase the price, not long-term potential supply we may benefit from in a couple of decades.
Hope this helped!