chapter 2
OIL

THE QUEST FOR OIL

On August 27, 1859, Edwin Drake struck oil sixty-nine feet below the surface of the earth near Titusville, Pennsylvania. This was the first successful modern oil well, which ushered in the "Age of Petroleum." Not only did petroleum help meet the growing demand for new and better fuels for heating and lighting, but it also proved to be an excellent fuel for the internal combustion engine, which was developed in the late 1800s.

Sources of Oil

Almost all oil comes from underground reservoirs. The most widely accepted explanation of how oil and gas are formed within the earth is that these fuels are the products of intense heat and pressure applied over millions of years to organic (formerly alive) sediments buried in geological formations. For this reason they are called fossil fuels. They are limited (nonrenewable) resources, which means that they are formed much more slowly than they are used, so they are finite in supply.

At one time it was believed that crude oil flowed in underground streams and accumulated in lakes or caverns in the earth. Today, scientists know that a petroleum reservoir is usually a solid sandstone or limestone formation overlaid with a layer of impermeable rock or shale, which creates a shield. The petroleum accumulates within the pores and fractures of the rock and is trapped beneath the seal. Anticlines (archlike folds in a bed of rock), faults, and salt domes are common trapping formations. (See Figure 2.1.) Oil and natural gas deposits can be found at varying depths. Wells are drilled to reach the reservoirs and extract the oil. Deep wells are more expensive to drill and are usually attempted only to reach large reservoirs or when the price of oil is high.

How Oil Is Drilled and Recovered

Oil is crucial to the economies of industrialized nations, and oil production is strongly influenced by market prices.

FIGURE 2.1

Scouting for new deposits and drilling exploratory wells is expensive. It is also costly to drill, maintain, and operate production wells. If the price of oil falls too low, operators will shut off expensive wells because they cannot recover their higher operating costs. In general, when oil prices are high, oil companies drill; when prices are low, drilling drops off.

Figure 2.2 shows a diagram of a rotary drilling system, or rotary rig. The rotating bit at the end of lengths

FIGURE 2.2

of pipe drills a hole into the ground. Drilling mud is pushed through the pipe and the drill bit, which forces the mud and bits of rock from the drilling process back to the surface, as shown by the "up" arrows in the diagram. As the well gets deeper, more pipe is added. The oil derrick supports equipment that can lift the pipe and drill bit from the well when drill bits need to be changed or replaced.

Oil deposits are not distributed evenly over the world, and some that have been tapped for decades are being exhausted. As an oil reservoir is depleted, various techniques can be used to recover additional petroleum. These include the injection of water, chemicals, or steam to force more oil from the rock. These recovery techniques can be expensive and are used only when the price of oil is relatively high.

TYPES OF OIL

While crude oil is usually dark when it comes from the ground, it may also be green, red, yellow, or colorless, depending on its chemical composition and the amount of sulfur, oxygen, nitrogen, and trace minerals present. Its viscosity (thickness, or resistance to flow) can range from as thin as water to as thick as tar. Crude oil is refined, or chemically processed, into finished petroleum products; it has limited uses in its natural form.

Crude oils vary in quality. "Sweet" crudes have little sulfur, refine easily, and are worth more than "sour" crudes, which contain more impurities. "Light" crudes, which have more short molecules, yield more gasoline and are more profitable than "heavy" crudes, which have more long molecules and bring a lower price in the market.

In addition to crude oil, there are two other sources of petroleum: lease condensate and natural gas plant liquids. Lease condensate is a liquid recovered from natural gas. It consists primarily of chemical compounds called penthanes and heavier hydrocarbons and is generally blended with crude oil for refining. Natural gas plant liquids are natural gas liquids that are recovered during the refinement of natural gas in processing plants.

USES FOR OIL

Many of the uses for petroleum are well known: gasoline, diesel fuel, jet fuel, and lubricants for transportation; heating oil, residual oil, and kerosene for heat; and heavy residuals for paving and roofing. Petroleum by-products are also vital to the chemical industry, ending up in many different foams, plastics, synthetic fabrics, paints, dyes, inks, and even pharmaceutical drugs. Many chemical plants, because of their dependence on petroleum, are directly connected by pipelines to nearby refineries.

HOW OIL IS REFINED

Before oil can be used by consumers, crude oil, lease condensate, and natural gas plant liquids must be processed into finished products. The first step in refining is distillation, in which crude oil molecules are separated according to size and weight.

During distillation, crude oil is heated until it turns to vapor. (See Figure 2.3.) The vaporized crude enters the bottom of a distillation column, where it rises and condenses on trays. The lightest vapors, such as those of gasoline, rise to the top. The middleweight vapors, such as those of kerosene, rise about halfway up the column. The heaviest vapors, such as those of heavy gas oil, stay at the bottom. The vapors at each level are then condensed to liquid as they are cooled. These liquids are drawn off, and the processes of cracking and reforming further refine each portion. Cracking converts the heaviest fractions of separated petroleum into lighter fractions to produce jet fuel,

TABLE 2.1

motor gasoline, home heating oil, and less-residual fuel oils, which are heavier and used for naval ships, commercial and industrial heating, and some power generation. Reforming is used to increase the octane rating of gasoline.

Refining is a continuous process, with crude oil entering the refinery at the same time that finished products leave by pipeline, truck, and train. Although storage tanks surround refineries, they have limited storage capacity. If there is a malfunction and products cannot be processed, they may be burned off (flared) if no storage facility is available. While a small flare is normal at a refinery or a chemical plant, a large flare, or many flares, likely indicates a processing problem.

REFINERY NUMBERS AND CAPACITY

In 2003, 149 refineries were operating in the United States, a drop from 336 in 1949 and 324 in 1981. (See Table 2.1.) Refinery capacity in 2003 was about 16.8 million barrels per day, below the 1981 peak of 18.6 million barrels. As of 2003 U.S. refineries were operating near full capacity. Utilization rates generally increased from a low of 68.6% in 1981—a period of low demand because

FIGURE 2.3

of economic recession—to a high of 95.6% in 1998. Although capacity fell slightly in the years since 1998, it was still high in 2003.

As Table 2.1 shows, fewer refineries were operating in the United States in the early twenty-first century than in the past, but they were working at near maximum levels. One reason for the drop in the number of U.S. refineries is that the petroleum industry began shutting down older, inefficient refineries and concentrating production in more efficient plants, which tended to be newer and larger.

Consolidation within the industry has also played a role in refinery operation. For example, the merger of Gulf Oil Corporation into Chevron Corporation in 1984 led to the closing of two large refineries, one in Bakersfield, California, and the other in Cincinnati, Ohio. In 1998 Exxon merged with Mobil Oil and BP merged with Amoco. BP Amoco then bought Arco in April 2000 to create the world's largest non-OPEC (Organization of the Petroleum Exporting Countries) oil producer and the third-largest natural gas producer. In the May 2004 article "Effects of Mergers and Market Concentration in the U.S. Petroleum Industry," in GAO Highlights, the General Accounting Office noted that "over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s." The report said that the majority of the mergers occurred later in that period and took place most frequently among firms involved in oil exploration and production. Industry officials suggest that mergers increase efficiency, reduce costs, and enhance a company's ability to control prices.

Another reason for the drop in the number of U.S. refineries is that some OPEC countries have begun to refine their own oil products to maximize their profits. This strategy, employed particularly by Saudi Arabia, led to a drop in demand for U.S. refineries. As of November 2002 no major refinery manufacturer had plans to begin construction, a process that takes three to five years to complete. The last large refinery built in the United States was completed in 1976, and the last completed refinery of any size began operation in Valdez, Alaska, in 1993. The Annual Energy Outlook 2004, produced by the Energy Information Administration (EIA), stated that financial and legal considerations make it unlikely that new refineries will be built in the United States.

LOSS AND VOLATILITY OF OIL INDUSTRY JOBS

As mergers in the oil industry restructure companies and make combined operations more efficient, not only are there fewer refineries, there are fewer jobs. From 1982 to 1992, for example, there was a loss of 28% of petroleum refining jobs.

In 1996, after a decade of low oil prices, drilling slowed and the demand for rigs collapsed. New rig construction stopped altogether. Thousands of rigs were left idle, sold for scrap metal, or shipped overseas, and their crews were put out of work. Idle rigs became a source of spare parts for those still operating. In 1997, following a rise in oil prices, the demand for rigs soared, but by 1998 the market for rigs had once again dwindled as oil prices sank. Rising oil prices resulting from OPEC restrictions in 1999 eventually boosted the demand for drilling equipment. Although crude oil prices declined in 2001, they rose again in 2003 and reached an all-time high in late 2004, again spurring demand for oil rigs. According to Baker Hughes Inc., a company that has tallied weekly U.S. drilling activity since 1940, domestic oil drilling has rebounded sharply since late April 1999, when a low point was reached following the oil price collapse of late 1997.

Job loss has also occurred in other facets of the oil industry. The number of seismic land crews and marine vessels searching for oil in the United States and its waters decreased sharply after 1981. From 1982 to 1992, oil-extraction companies lost 51% of their workforce. In Texas, once the center of the U.S. oil industry, jobs plummeted from 80,000 in 1981 to 25,000 in 1996. In 1998 the Texas Comptroller of Public Accounts estimated that for every $1 drop in the price of oil per barrel, 10,000 jobs are lost in the Texas economy. That translated into 100,000 jobs lost in the Texas oil industry from October 1997 to December 1998. According to a February 6, 1999, article in the New York Times ("Oil Industry Sees More Losses"), the oil industry lost 24,415 jobs between November 1997 and February 1999 because of the decline of oil prices during that period. But domestic oil drilling rebounded sharply between mid-1999 and late 2004, creating an upswing in numbers of oil industry jobs.

DOMESTIC PRODUCTION

U.S. production of petroleum reached its highest level in 1970 at 11.3 million barrels per day total. (See Table 2.2.) Of that amount, 9.6 million barrels per day were crude oil. (See Figure 2.4.) After 1970 domestic production of petroleum declined. By 2003 U.S. domestic production averaged about 7.5 million barrels per day. (See Table 2.2.) Of that amount, 5.7 million barrels per day were crude oil. (See Figure 2.4.) Figure 2.5 shows the overall flow of petroleum in the United States for 2003.

According to the Annual Energy Review 2003, published by the EIA, in 2003 the 520,000 producing wells in the United States produced an average of eleven barrels per day per well, significantly below peak levels of more than eighteen barrels per day per well in the early 1970s. Any new oil discoveries are unlikely to result in a significant increase in domestic production in the near future because of the long lead-time needed to prepare for production.

Most domestic oil production takes place in only a few U.S. states. Texas, Alaska, Louisiana, California, and the offshore areas around these states produce about 75% of the nation's oil. Most domestic oil (about 64%, or 3.7

TABLE 2.2

FIGURE 2.4

million barrels per day) comes from onshore drilling, while the remaining 2.1 million barrels come from offshore sources. (See Figure 2.6.) Supplies from Alaska, which increased with the construction of a direct pipeline in the late 1970s, have begun to decline. Notice how the gap between "Total" and "48 States" is narrowing in Figure 2.7; this gap is Alaska's share of U.S. oil production.

Unless protected wildlife refuges in Alaska are opened for drilling, U.S. oil production will likely continue its decline. The Alaskan government and the administration of President George W. Bush strongly support drilling for oil in Alaska's Arctic National Wildlife Refuge. But there is great controversy over this proposal because of environmental concerns. The U.S. House of Representatives has approved drilling in the Arctic refuge in the past, only to have the proposal repeatedly fail in the Senate. As of November 2004 no agreement had been reached.

The United States is considered to be in a "mature" oil development phase, meaning that much of its oil has already been found. The amount of oil discovered per foot of exploratory well in the United States has fallen to less than half the rate of the early 1970s. Of the country's thirteen largest oil fields, seven are at least 80% depleted. Geological studies have estimated that 34% of the undiscovered recoverable resources are in Alaska, but it is uncertain whether the oil will ever be recovered.

Domestic production is also hampered by the expense of drilling and recovering oil in the United States compared to the expense incurred in Middle Eastern countries. Middle Eastern producers can drill and bring out crude oil from enormous, easily accessible reservoirs for around $2 a barrel. In contrast, the U.S. Department of Energy (DOE) estimates it costs an American oil producer about $14 to produce a barrel of oil, not counting royalty payments and taxes, which add to the cost. Of all the successful domestic oil wells drilled, only about 1% have been "wildcat" wells that have led to the discovery of new large fields, and these discoveries have provided only minor additions to the total proved reserves.

DOMESTIC CONSUMPTION

In 2003 most petroleum was used for transportation (66%), followed by industrial use (25%), residential use (4%), electric utilities (3%), and commercial use (2%). (See Figure 2.8.)

Most petroleum used in the transportation sector is for motor gasoline. In the residential and commercial sectors, distillate fuel oil (refined fuels used for space heaters, diesel engines, and electric power generation) accounts for most petroleum use. Liquid petroleum gas (LPG) is the primary oil used in the industrial sector. In electric utilities residual fuel oils are used the most.

A modest decline in residual fuel oil consumption has been caused by the conversion of electric utilities and plants from heavy oil to coal or natural gas energy. An initial decline in the amount of motor gasoline used, beginning in 1978, was attributed to the federal Corporate Average Fuel Economy (CAFE) regulations, which required increased miles-per-gallon efficiency in new automobiles. However, motor gasoline use has increased steadily since then, partly from an increase in users and partly from a leveling off in vehicle efficiency as consumers once again prefer less efficient vehicles, such as larger automobiles and sport utility vehicles (SUVs).

WORLD OIL PRODUCTION AND CONSUMPTION

Total world petroleum production has increased somewhat steadily, reaching 69.5 million barrels per day in 2003, after a downturn in the early 1980s. (See Table 2.3.) The major producers in 2003 were, from most to least, Saudi Arabia, Russia, the United States, Iran, China, Mexico, Norway, United Arab Emirates, Venezuela and Canada, and Nigeria and Kuwait. (See Figure 2.9.) Together, Saudi Arabia, Russia, and the United States accounted for 33% of the world's crude oil production.

Like total world petroleum production, total world petroleum consumption has increased somewhat steadily, reaching 78.2 million barrels per day in 2002. (See Table 2.4.) In 2002 the leading petroleum consumers were, from most to least, the United States, Japan, China, and Russia. Figure 2.10 shows the major petroleum consumers of selected Organization for Economic Cooperation and Development (OECD) countries—a group of thirty nations

FIGURE 2.5

committed to democratic government and a market economy. They develop and refine economic and social policies. The major OECD consumers in 2002 were, in order, the United States, Japan, Germany, South Korea, Canada, France, Mexico, Italy, United Kingdom, and Spain. The United States was by far the leading consumer in either category, using 19.8 million barrels per day, followed by Japan (5.3 million barrels a day), China (5.2 million barrels a day), Germany (2.7 million barrels a day), and Russia (2.6 million barrels a day). (See Table 2.4.)

OIL IMPORTS AND EXPORTS

Around the world there are inequities between those countries that use petroleum and those that possess it. Countries with surpluses (Saudi Arabia, for example) sell their excess to others that need more than they can produce (the United States, China, Japan, and western European countries). Petroleum is sold as crude oil or as refined products. World trade has been moving toward refined products, as the petroleum-exporting countries have realized that they can make a greater profit from refined oil products than from crude oil.

Though the United States produces a significant amount of petroleum, it has been importing oil since World War II (1939–45). This reflects the gradual exhaustion of reserves in the United States and the growing energy demand caused by population growth and economic expansion. Initially, the relatively low price of foreign oil encouraged U.S. dependence on it. American industry and economic life have been built on oil's cheap availability. But the price of foreign oil has gone up, and OPEC controls its availability.

Relatively low crude oil prices and the resulting reduced domestic oil production are the major causes of an increase in imports since 1985. From a low total net import (imports minus exports) of 4.3 million barrels per day in 1985, oil net imports increased to 11.2 million barrels per day by 2003. (See Table 2.2.) In 1985 imported oil supplied only 27.3% of American oil consumption. Just five years later, in 1990, the proportion had risen to 42%, and by 2003 it was 56.1% as demand continued to grow. (See

FIGURE 2.6

FIGURE 2.7

Figure 1.6 in Chapter 1.) According to the Energy Information Administration's Annual Energy Review 2003, the leading suppliers of petroleum to the United States in 2003 were, from most to least, Canada, Saudi Arabia, Mexico, Venezuela, Nigeria, Iraq, United Kingdom, and Norway.

CONCERN ABOUT OIL DEPENDENCY

In the 1970s the United States and its leaders were very concerned that so much of the U.S. economic structure, based heavily on oil, was dependent upon the decisions of OPEC countries. Oil resources became an issue of national

FIGURE 2.8

security, and OPEC countries, especially the Arab members, were often portrayed as potentially strangling the U.S. economy. The decisions of the Ronald Reagan and George H. W. Bush administrations in the 1980s and early 1990s to permit the energy issue to be handled by the marketplace was consistent with their economic philosophy but indicated that they saw oil supply as an economic, not a political, issue. This downplayed the political side of the energy problem in the international arena. The Clinton administration was unable to do much about America's dependence on foreign oil, as low prices throughout most of the 1990s set back energy conservation measures and public concern. In the United States efficiency gains in automobiles have been offset by the preference for large vehicles, such as SUVs. Such preferences imply lack of public interest in reducing the consumption of foreign oil. By 2003 about 63% of the nation's crude oil supply came from outside the country, as shown in Figure 2.5, and 42.2% of that came from OPEC nations, as reported in the Annual Energy Review 2003.

The decline in public concern about America's dependence on foreign oil is the result of factors other than low prices and the desire for large vehicles. One factor is a "comfort level" with oil that has been achieved through oil reserves, non-OPEC suppliers, and decreased demand. The United States and European nations have developed substantial reserves to withstand oil supply fluctuations. These reserves include the Strategic Petroleum Reserve (SPR) in the United States and government-required reserves in Europe. Furthermore, in emergencies, non-OPEC oil producers such as the United Kingdom and Norway can increase their output. Although demand for oil had stabilized in the 1990s because of the conservation efforts of many industrialized nations, particularly European countries, the demand increased in the early 2000s as China, Japan, and the United States consumed more energy.

The increased use of pipelines across Saudi Arabia and Turkey has made the job of picking up oil from these countries safer. A growing number of tankers pick up their oil in either the Red Sea or the Mediterranean Sea before delivering it to Europe or the United States. These ships do not have to go through the potentially dangerous Persian Gulf. In addition, since many American strategists are wary of navigation in the Straits of Hormuz, where a future enemy might be able to stop the flow of oil to the West, shipment through pipelines lessens the importance of the waterway. On the other hand, such pipelines could be destroyed relatively easily in a war.

Based on these factors, if the oil shortages that developed in 1973 and 1979 occurred again, the result would likely not be the same. Despite the U.S. role as protector of Kuwait's oil in the Persian Gulf, there seemed to be little serious concern that America's dependence on foreign oil, especially OPEC oil, represented a threat to national security or national stability. This position changed somewhat after the terrorist attacks of September 11, 2001, and their aftermath—the "War on Terrorism," which included the war with Iraq and the consequent unrest in Middle Eastern nations. These events resulted in a sense that the United States should be less dependent on foreign oil, yet demand for the product persisted. In 2002 experts suggested that if the United States attacked Iraq, as it ultimately did in March 2003, the result might be a stabilization of the supply and price of oil (Michael E. Kanell, "War in Iraq: Is It about Oil?" The [Montreal] Gazette, October 26, 2002). Nevertheless, in late 2004 oil prices had not stabilized. In fact, oil prices increased dramatically at that time as concerns about terrorism in Iraq and elsewhere rose, the value of the dollar declined, demand for oil remained high, and oil supplies and reserves were tight.

PROJECTED OIL SUPPLY AND CONSUMPTION

The EIA, in its Annual Energy Outlook 2004, projected that domestic crude oil production in the lower forty-eight states would increase from 4.6 million barrels per day in 2002 to 5.2 million barrels per day in 2008, then decline to 4.1 million barrels per day in 2025. The projected peak in production in 2008 is attributed to offshore production. The EIA projects that total offshore oil production will rise to 2.5 million barrels per day in 2008, then decline to 2.1 million barrels per day in 2025. Onshore lower forty-eight oil production is projected to decline, with 2025 values ranging from 1.9 million barrels per day to 2.1 million barrels per day. Crude oil production in Alaska is expected to continue at about 900,000

TABLE 2.3

FIGURE 2.9

barrels per day through 2016; it is then projected to decline to 510,000 barrels per day in 2025.

Due to declines in crude oil production after 2008 and in Alaska in 2016, the domestic petroleum supply is expected to decline after 2008 as well. However, consumption is projected to increase significantly from 2002 to 2025 (see Figure 2.11.) Thus, the EIA projects an increasing dependence on petroleum imports, with imports filling 70% of American petroleum needs in 2025, up from 53% in 2002. (See Figure 2.11.)

STRATEGIC PETROLEUM RESERVES

In 1923 the Warren G. Harding administration set up the Petroleum Reserve to ensure that the U.S. Navy would have adequate fuel in the event of war. In 1975, in response to the growing concern over America's energy dependence, Congress turned the Strategic Petroleum Reserve (SPR) over to the Department of the Interior under the Energy Policy and Conservation Act (PL 94–163). An additional law, PL 101–383, expanded the SPR and created a second reserve for refined products.

SPR oil is stored in deep salt caverns located at four storage sites in Louisiana and two in Texas. (Oil does not dissolve salt the way water does.) Each site's caverns vary in capacity, but most can hold approximately 10 million barrels of oil. The SPR system currently has forty-one such caverns. If the United States suddenly found its supplies cut off, the reserve system would be connected to existing commercial lines that would start pumping the oil.

At the end of 2003 the SPR contained 638 million barrels (see Figure 2.12), enough to equal fifty-seven days of imported oil should the supply be cut off (see Figure 2.13.) The SPR increased in 2002 and 2003 due to the importation of sixty-four million barrels of crude oil for this purpose. Figure 2.13 shows a decline in the reserves, from a high of 115 days in 1985 to the current fifty-seven days. This decline is the result of two major factors:

1. It reflects the increase in imports since 1985. As the nation has imported a greater amount of oil, the days of import replacement represented by the amount of oil in the SPR have dropped.
2. It reflects a real decline in quantity. In 1996–97, millions of barrels of oil were sold (at a loss of $10 a barrel or so) to help balance the federal budget. Also, oil was withdrawn from the reserves at the start of the Persian Gulf War in 1990–91. In September 2000 President Clinton authorized the release of 30 million barrels of oil to bolster oil supplies, particularly heating oil in the Northeast.

OIL PRICES

The law of supply and demand usually explains oil price changes; the price of goods reflects a relationship

TABLE 2.4

FIGURE 2.10

FIGURE 2.11

between the supply (availability) and the demand (need). Higher prices increase production, as it becomes profitable to operate more expensive wells, and reduce demand, as consumers lower usage and increase conservation

FIGURE 2.12

efforts. The factors also work the other way: Reduced demand or increased supply generally cause the price of oil to drop.

The demand for petroleum products varies, and petroleum prices usually fluctuate with demand. Heating oil demand rises during the winter. A cold spell, which leads to a sharp rise in demand, may result in a corresponding price increase. A warm winter may be reflected in lower prices as suppliers try to clear out their inventory. Gasoline

FIGURE 2.13

demand rises during the summer, when people drive more on vacations and for recreation, and gas prices usually rise as a consequence. Petroleum demand also reflects the general condition of the economy. During a recession, demand for and production of petroleum products drops. Wars and other types of political unrest in oil-producing nations add volatility to petroleum prices, which fluctuate—sometimes dramatically—depending on the situation at the time.

While consumers prefer low prices that allow them to save money or get more for the same price, producers naturally prefer to keep prices high. Oil producers formed the OPEC cartel in 1960. A cartel is a group of businesses that agree to control production and marketing to avoid competing with one another. Since 1973 OPEC has tried to control the oil supply in order to achieve higher prices.

OPEC has faced long-term problems, however, because high prices in the late 1970s to mid-1980s encouraged conservation, reducing demand for oil and leading to a sharp decline in oil prices. As a result of the decreased demand for oil and lower prices, OPEC lost some of its ability to control its members and, consequently, prices.

Nevertheless, OPEC actions can still effectively influence the petroleum market. For example, in an attempt to halt the downward slide of oil prices in 1999, Saudi Arabia, Mexico, and Venezuela agreed to cut production by 1.6% to 2 million barrels a day. Many other oil-producing nations also limited their production. The limitations worked: During the summer of 2000 oil prices climbed. According to a 2001 report by the Energy Information Administration (EIA) of the Department of Energy (Annual Energy Review 2000), the price in real dollars paid by refiners for crude oil in 1999 averaged $16.71 per barrel, and in 2000 averaged $26.40 per barrel.

Gasoline Prices

Many middle-aged and older Americans can remember when gas cost 30 cents per gallon in the early 1970s. From 1973 to 1981, the price of a gallon of leaded regular gasoline (in current dollars that do not consider inflation) more than tripled, while the price in real dollars (adjusted for inflation) rose 81%. (See Table 2.5.) In real dollars the price of a gallon of regular unleaded gasoline was $2.33 in 1981. However, after 1981, as a result of the international oil glut,

TABLE 2.5

real prices tumbled. In 1998 the price was only $1.10, and after price increases in 1999, the price of gas still only averaged $1.51 in 2000 and 2003. By the fall of 2004, however, gasoline prices hovered around $2.00 per gallon.

ENVIRONMENTAL CONCERNS ABOUT OIL TRANSPORTATION

Transporting oil carries significant environmental risks. According to the U.S. Department of the Interior, the cause of most transportation spills is oil tanker accidents, such as the grounding of the Exxon Valdez in 1989.

The Exxon Valdez Oil Spill

A number of events have influenced American attitudes toward oil production and use. One of the most notable occurred in March 1989, when the Exxon Valdez oil tanker hit a reef in Alaska, spilling 11 million gallons of crude oil into the waters of Prince William Sound. The cleanup cost Exxon $1.28 billion, which does not include legal costs or any valuation of the wildlife lost. The spill was an environmental disaster for a formerly pristine area. Even measures used to clean up the spill, such as washing the beaches with hot water, caused additional damage.

The Exxon Valdez spill also led to debate about added safety measures in the design of tankers. Tankers are bigger than ever before. In 1945 the largest tanker held 16,500 tons of oil; today, supertankers carry more than 550,000 tons. These supertankers are difficult to maneuver because of their size and are likely to spill more oil if damaged. Although there have been fewer spills since 1973, the amount of oil lost has been roughly the same.

The Oil Pollution Act of 1990

The Exxon Valdez oil spill led Congress to pass the Oil Pollution Act of 1990 (PL 101–380) after having debated the issue for sixteen years. The bill increased, but still limited, oil spillers' federal liability (financial responsibility) as long as a spill is not the result of "gross negligence." The bill also mandates compensation to those who are economically injured by oil-spill accidents. Damages that can be charged to oil companies are limited to $60 million for tanker accidents and $75 million for accidents at offshore facilities. The rest of the cleanup costs are paid from a $500 million oil-spill fund generated by a 1.3 cents-per-barrel tax on oil. Individual states still maintain the right to impose unlimited liability on spillers. Oil companies were also required to phase in double hulls on oil vessels over a twenty-five-year period by 2015. Double hulls provide an extra container in case of accidents.

Accidents Still Occur Worldwide

In mid-November 2002 the twenty-six-year-old, single-hulled tanker Prestige was first damaged, then sank in the Atlantic Ocean off the coast of Spain. The Spanish government estimates the ship spilled approximately 5,000 tons of heavy fuel oil when it was damaged and an additional 12,000 tons as it sank. The ship continued to leak, and the Spanish authorities ordered the leaking vessel to be towed to the open ocean. As of mid-2004 an international team of scientists estimated that the oil spilled from the Prestige caused the deaths of nearly 250,000 seabirds. The spill also killed unknown numbers of fish and dolphins, and was responsible for economic damage to the Galician fish and shellfish industries, closing the Spanish coastline to fishing.