The Oil Blame Game

Anyone who purchases home heating fuel or drives an automobile is aware that oil prices are on the rise again. Each time the price of oil increases, media outlets run stories explaining the rise and listing who (or what) is the principal culprit, typically one or more of: OPEC, speculators, or taxes.

Although OPEC's 11 members collectively produce more oil than any other country and have the greatest share of the world's remaining oil reserves, these two facts do not mean that OPEC has an unlimited supply of oil. With the exception of Saudi Arabia and the United Arab Emirates, most OPEC members are producing near their maximum capacity, meaning that OPEC's ability to increase output is limited. Output from at least two of OPEC's members (Indonesia and Venezuela) peaked in the last century.

There are a number of reasons why OPEC members want oil prices to remain high. First, the U.S. dollar is weak, meaning that the revenue generated from the sale of a barrel of oil will purchase less than it did in previous years. Second, as oil production falls, individual countries will attempt to maximize their revenues. And third, most OPEC members have populations where the majority of their citizens are under 25 years of age; oil revenues can help meet the demands of these people.

By focusing solely on the United States, it is possible to blame the rise in the price of oil on speculators; however, this is a very narrow view that overlooks a number of issues. For example, cold weather in Europe and East Asia pushed the price of oil higher this past winter, as has China's increasing demand for oil, notably in the transportation sector.

China's entry onto the world oil market is taking the world by storm. Prior to 1993, China produced more oil than it consumed. In 2003, China overtook Japan as the world's second largest consumer of oil. Last year, there was no spare oil tanker capacity in the Pacific Ocean -- any available tankers had been leased to transport oil to China. Today, China's oil industry is attempting to become a player in a number of regions, including Alberta's tar sands and Sudan.

A common misconception associated with the price of gasoline in Nova Scotia is that half the cost of a litre of gasoline is taken in taxes. The price of a litre of gasoline in Nova Scotia is based upon variable costs (cost of crude, refiner margin, and marketing margin), together with the fixed provincial motive fuel tax (15.5 cents) and the federal excise tax (10 cents). This total is then subject to the 15 percent HST. When the pump price exceeds 69 cents per litre, the taxes are no longer the dominant component. As the price of oil continues to increase, lowering taxes by a penny-or-two will make little difference in the overall cost.

The world's consumption of oil is increasing at an alarming rate: at the start of 2003, it was 80.3 million barrels a day; two years later, at the start of 2005, it was 84.7 million barrels a day. As demand continues to grow and supplies become tighter, it is a safe bet that the price of oil will increase well beyond what it is today.

Rather than blaming OPEC, speculators, the Chinese, or taxes, we should be developing a provincial energy policy that allows Nova Scotians to reduce their demand for oil.

An abridged version of this was published in the Daily News - 19 April 2005