Econ 101...The Law of Supply and Demand

Yesterday, near Terrell, TX, I filled my car’s gas tank for ONLY $1.99 a gallon. That sounds cheap doesn’t it? I suppose it does to those of you a little younger than I. The problem is, I can still remember paying less than 25 cents a gallon for gasoline. I am not an economist and will not or cannot presume to make any economic predictions. But I did take Econ 101 in college and can make a few comments on what happened.

We know that the price of oil has dropped tremendously. Here are a few facts. Yesterday, December 18, the median price was right at $57 per barrel. Back in June the price of oil was around $115 per barrel and most of this decade has seen oil prices hovering around $100 per barrel. In 2008, the U.S. oil production was 5 million barrels a day. By November of this year production was 9 million barrels per day, almost double that of 2008. The price of oil in 1998 was only $17 per barrel.

So, why has the price of oil crashed? All you really need to know comes from Econ 101 and is known as the Law of Supply and Demand, which I do not believe has been rescinded. There are four parts to this Law:

1.     If demand increases and supply remains unchanged, a shortage occurs, leading to higher prices.

2.     If demand decreases and supply remains unchanged, a surplus occurs, leading to lower prices.

3.     If demand remains unchanged and supply increases, a surplus occurs, leading to lower prices.

4.     If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher price.

So, for the answer to what happened all one needs to do is to look at the four parts of the Law. Specifically, read part 4. Supply outstripped demand, leading to lower prices That’s right, high oil prices had the oil and gas companies pumping and hydraulic fracturing, or fracking, as hard as they could. They were making a killing at those prices (just check their stock prices). Unfortunately for them, this created the oil glut in which they currently find themselves. They simply produced more oil than we were using or were willing to purchase.

Is this good or bad? That depends on who you are. Obviously, if you are dependent upon the profits of the oil and gas industry, it is not so good. On the other hand, if you are a farmer, trucking company, airline, railroad, or customer of any of these businesses, then the crash in the price of oil is a good thing. A drop in manufacturing and transportation costs could lead to a drop in retail prices, which would benefit all consumers.

From a strictly personal point of view, one of the best things that could result from these lower oil prices would be the death of fracking. Fracking is a severe threat to the ecology of the earth. It pollutes the air, soil, and water. It also requires millions of gallons of fresh water per well and that water is lost forever. Fracking renders the water too toxic to be recycled for reuse. Large portion of the U.S. oil producing areas  are currently in the third or fourth year of one of the most severe droughts on record. We should not be destroying this precious, life-sustaining, and irreplaceable resource.

The cost to pump oil from a fracked well in the U.S. today is about $65 per barrel. The industry can’t continue to pump oil at a cost of $65 per barrel and sell it for $57 per barrel and stay in business (I learned that in Econ 101 also). However, fracking will continue as long as the price of oil is high enough to cover the variable costs of pumping from wells already drilled, but once they have sucked the existing wells dry I do not imagine there will be many, if any, new wells fracked.

No one knows how long oil prices will remain low. But from your Econ 101 lesson you can guess what will, in all probability, occur eventually. If you aren’t sure, just check out part 4 of the Law of Supply and Demand.

Fracking Oil Wells

Don’t get me started on “fracking,” - hydraulic fracturing – where an average of 5.6 million gallons of fresh water (while Texas is in the fourth year of an extreme drought) is removed from local streams, lakes, and aquifers. This is then used to inject an average of 4 million pounds of toxic and hazardous chemicals under pressure into an older oil or gas well that has ceased to be productive. This “loosens” up the shale and allows access to previously unavailable oil and gas.

The fracking fluid formulas are proprietary trademarks and kept secret. Even OSHA doesn’t know their composition, except that it could contain any of around 700 different chemicals, many of these are listed OSHA as “Hazardous” and “Carcinogenic” (cancer causing). The amount of fracking fluid required for a typical 7-well site requires 13,000 round-trip tanker truck trips on local highways. The drivers can work up to 20 hours per shift because they are exempt from the labor laws regulating work hours. It should come as no surprise that the most common way for workers in the fracking industry to be injured on the job is by being involved in a motor vehicle accident. According to OSHA, these drivers are killed in accidents at a rate eight times higher than the general population. I don’t know how many innocent lives they take with them. Then there are the 3,600 gallons of poison that might spill from a truck involved in an accident.

As of February of this year there were 1.1 million active oil and gas wells in the US, more than 300,000 of them in Texas alone. How many Texas wells are actually being fracked is unknown because Texas is the only state that charges a fee for researchers to obtain location data for its wells. Even when the fee is paid, Texas does not allow the data to be redistributed (trying to keep it a secret?).

One of the fracking pollutants is methane gas. It can seep from the fracked wells and dissolve in the groundwater. This causes a very interesting phenomenon. Water from many rural water wells in fracking areas will burn when a flame is introduced. That’s right. The water is flammable. Although they deny that fracking has anything to do with it, the frackers have recommended that folks install vents on their water wells to help lower the methane concentration in the water.

In addition to the flammable water there is now an earthquake problem in Texas and Oklahoma. By injecting the fracking fluids so deep into the earth, the fluid lubricates the continent’s tectonic plates and causes them to slip and slide more easily over one another. Of course, the end result has been a rash of earthquakes in the fracking areas. Although this explanation is supported by evidence from scientific studies the energy companies deny that fracking has anything to do with the earthquakes. There are billions, maybe trillions, of dollars to be made and money – or enough of it – trumps scientific proof any day.

One industry that obviously believes fracking pollutes and leads to accidents is the insurance industry. Insurers are now writing homeowner’s policies that do not cover harm from fracking. Nationwide announced that it would not cover fracking risks because they “are too great to ignore.” They are not going to accept the liability.

How do the frackers get away with all of this? Because they are exempt from many of the EPA and Clean Water Act regulations. That’s what an enormous amount of lobbying money can buy. A license to pollute.

Fracking is also used in Canada to access the shale oil, or ” tar sands.” This type of oil is more difficult to refine than “regular” oil and Canada doesn’t have the refining capacity to handle it. The Keystone XL (KXL) Pipeline is being built from Canada to refineries in Texas and Louisiana to solve this problem. In planning the route for the pipeline, the Canadian company, TransCanada, hasn’t been letting private property get in their way. They have been using the law of eminent domain and the threat of exorbitant litigation costs to bully landowners into accepting TransCanada’s “fair” offer. The property owner can take it or leave it. This could change as it is now being challenged in the courts.

Once (or if) the pipeline is finished it will take the oil straight to the Gulf coast refineries, which just happen to be America’s leading export refineries. It seems that after all of the damage that could be done by the pipeline we won’t even get to use the end product. It will be for export.

So what’s one more pipeline? It will only add about a thousand miles to the 2.6 million miles of propane, gas, and oil pipelines already crisscrossing the US – of which only about twenty per cent have been inspected by federal or state regulators (too few inspectors for too many miles of pipeline). There are about 250 significant pipeline “incidents” (the pipeline companies don’t call them “accidents”) a year that cause explosions, pollution, property damage, injury, and death in the US. These are the reported incidents.

In September of last year a North Dakota farmer discovered what turned out to be the largest onshore oil spill in US history. The six-inch diameter pipeline owned by the Tesaro pipeline company had been leaking from a quarter-inch hole for eleven days when found by the farmer. An area the size of seven football fields had been inundated with 865,000 gallons of fracked oil.

The Keystone XL pipeline will be thirty-six inches in diameter. What will happen when (not if) it springs a leak? The company has been accused of shoddy work in Oklahoma as evidenced by the high number of weld rejection rates and the shocking number of excavations/repairs needed to fix the many dents, sags, and damaged pipe coating. This has stimulated federal Pipeline and Hazardous Materials Safety Administration (PHMSA) to add two new special safety requirements to the 57 agreed to by TransCanada 3 years ago. The 2 new ones involve a stricter Quality Management system and the hiring of an independent third party inspection company to monitor the construction of the Keystone XL pipeline.

Many “oil field incidents” go unreported each year. An Associated Press investigation into the Tesaro pipeline disaster in ND found that nearly 300 oil spills and 750 “oil field incidents” had gone unreported from January 2012 until September 2013 in that one state alone. EnergyWire reported last month that the US oil and gas industry was responsible for at least 7,662 spills, blowouts, and leaks in 2013 – or about twenty a day.

I’ve already ranted far too long and have only scratched the surface of fracking. I haven’t gotten to Wall Street and the “distribution of wealth,” which is turning this country into an oligarchy ruled by the wealthiest of the wealthy. Then there is texting while driving, global warming, immigration, gun violence, and gun control. In the coming weeks and months I hope to individually address each of these issues along with others that strike my fancy. It is truly amazing the amount of information we now have at our disposal.