1. Governments around the world have been nationalizing their oil companies. At this time, 80% of all oil reserves are controlled by government companies. This means that price increases can no longer stimulate the kind of production which would bring gasoline prices back down. Russia finds political advantage in restricting production by under-exploring its oil in Eastern Siberia.
2. Governments have selfishly milked their oil companies of profits, leaving them little money for exploration and expansion. Mexico and Venezuela have taken so much money off the top that their oil companies are producing less and less every day.
3. Rebels are attacking oil facilities in many countries from Nigeria to Iraq, severely curtailing production. Major USA supplier Nigeria has lost more than 25% of its production to rebel disruptions.
4. Established oil fields are aging. All but a few have lost pressure. This means that water or gas must be pumped into the ground or below the seas to generate enough pressure to get oil flowing. Saudi Aramco must now pump four barrels of water into the ground in order to produce one barrel of oil. The British pump gas into their Brent oil fields in the North Sea. This makes production very expensive and introduces water and gas availability as constraining factors.
5. New oil field discoveries are in remote, difficult places. Oil developments in Sakhalin Island, Kazakhstan and Saudi Arabia have been fraught with delays, cost overruns and controversy. Oil partners are quarreling, all playing the blame game. The Saudis are trying to bring a huge new field into production. But the rock strata is such that there is no pressure. To start things up, the Saudis will have to pump two barrels of water into the ground to get one barrel of oil out. Costs are estimated to be $18 billion. As one oil expert said, "The Saudis are going to have to do everything perfect to make this work." (Is this what the press means when they say, "The Saudis should turn on the spigots"?)
6. Governments interfere with the free market by subsidizing their consumers. Indonesia, Iran, Mexico, Venezuela, Saudi Arabia and others subsidize their most widely used petroleum products – kerosene, diesel, heating oil and gasoline. This causes consumers to use more oil than they would, resulting in a drain on world supply. Indonesia, a traditional oil exporter and member of OPEC, has been transformed from an exporter into an oil importer.
7. China and India are rapidly developing economically, which means rapidly increasing oil imports. Since 2001, Russia has doubled its oil production, but every new barrel was eagerly gobbled up by China and India. Thus, instead of prices going down, they went up. Now that Russian production has leveled off and is falling, and China and India are still expanding economically, you can see one of the biggest reasons we are into petroleum scarcity and rapidly increasing prices.
8. High oil prices have made many oil producers wealthy. The result of the new affluence is new industries and new cars. Thus the amount of oil they have available for export is declining in favor of domestic use. Iran may run out of exportable oil in six years due to increasing domestic consumption. Saudi Arabia's nouveau riche compete with exports for Saudi Aramco's oil production.
9. Because oil production is a dirty business (environmentally speaking), political movements in developed countries have blocked development and exploitation of oil and gas reserves. America's huge gas finds in Alaska cannot be used because politicians have blocked construction of the pipeline needed to bring it to the lower 48 states. Oil companies have been blocked from drilling off the coasts of California and Florida. And nobody in the USA wants a refinery built in his backyard. Senator Kennedy even blocked the construction of windmills within view of his home. And windmills are very clean.
10. Alternate fuels development have failed to live up to promise. Ethanol has become a political boondoggle designed to enrich farmers and producers with generous government subsidies. On a net basis, no new energy results from converting corn into fuel. More greenhouse gasses are produced and the whole process has set off a worldwide food inflation.
11. Some big oil companies have not been pulling their weight. Exxon is a prime example. Putting their stockholders first, Exxon has drastically underspent on oil exploration and facilities construction. In fact, Exxon has been spending more money buying back its stock than it has on oil projects. This results in two things: (i) Exxon stock goes up as its outstanding shares supply is reduced, and (ii) gas prices go up as limited exploration results in lower petroleum supplies.
TV analyst Jim Cramer has shouted, "If you want to invest in oil companies, don't buy Exxon. Exxon doesn't explore. It buys back stock. Exxon is not an oil company, it is a huge bank. If you want to invest in oil, buy a company that explores."
Exxon refused to invest in projects which would have been profitable at $45 oil. The company held back at $65 oil. Now stockholders are complaining that Exxon missed out on huge future profits by doing so.
BUT, even if Exxon had done everything right, it would not have made much of a dent
in high oil prices because of the other ten factors.
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We are into $4-a-gallon gas, moving rapidly toward $5-a-gallon, and more and more.