Prices for crude oil and petroleum products have increased dramatically over the past 24 months. As shown in Table 1, prices have more than doubled from 2004 levels with the sharpest increase in 2006. Many people wonder why this has happened and who or what is to blame. Some speculate high crude oil prices are the result of price gauging or market manipulation; others theorize the high level of control over conventional oil reserves is a reason for the increase in price while still others site international political events such as nuclear development in Iran, the gulf war in Iraq, anti-American sentiment in Venezuela, and civil strife in Nigeria. Additional factors mentioned include natural disasters, infrastructure issues, or energy and environmental legislation which impact both crude oil and refined petroleum products prices.

Source: Petroleum Navigator, Spot Prices, EIA, 2006

Economic theory teaches price is a function of supply and demand: when supplies decrease and demand increases, prices increase. As with any commodity, crude oil prices are largely influenced by these market forces. The following discussion touches on these issues, but argues that the major cause for higher crude oil prices is simply that, in key regions, there is concern that supplies cannot keep up with rapidly growing demand. Biofuels present an opportunity to reduce our reliance on crude oil and petroleum products by providing a domestic energy source.

Pressure On Prices
Tables 2 and 3, illustrate trends in crude oil production and consumption over the period 1980 to 2005 for the leading oil producing and consuming nations. At first glance, these data do not explain the recent surge in crude oil prices. However, looking beyond the data recent developments in both oil producing and consuming nations have caused concern in commodity markets resulting in price increases.

* Russia data prior to 1989 represent production for all of U.S.S.R.
Source: International Energy Annual 2003, Table G2, EIA; 2006 International Petroleum Monthly, Table 11.b, EIA

* Russia data prior to 1989 represent demand for all of U.S.S.R.
Source: International Energy Annual 2003, Table 1.2, EIA; 2006 International Petroleum Monthly, Table 1.7, EIA

As shown in Table 2, the majority of the countries which have experienced periods of political and social unrest have also experienced declines in oil production. A few key points:

• Iraq's sporadic oil production which was largely due to the consequences of the Gulf War in 1990 as well as the ongoing effort to establish a democracy.
• Venezuela's recent decrease in production has occured at the same time President Hugo Chavez has: encouraged socialist governments in South America, lobbied OPEC to reduce oil production, and forced petroleum sector private-public partnerships and profit sharing within Venezuela.
• Iran's recent decision to pursue nuclear capabilities has futures markets wary of international oil sanctions or reduced production capacity.²
• Crude reserves among world oil suppliers such as Saudi Arabia are not increasing at rates seen in past decades.

Moreover, OPEC has made little or no investment in oil production capacity in recent years and the productivity of investments in non-OPEC production areas has declined. Even though world oil production has increased at a steady pace since 1980, all of the above incidents help cause speculation and affect oil prices in commodity markets. U.S. vulnerability to world oil markets is exacerbated by an increase in U.S. dependence on oil imports, which has climbed to approximately 60 percent of its total crude oil consumption.

U.S. crude oil production has declined steadily over the past ten years. This was further exacerbated by the 2004 and 2005 hurricanes in the Gulf Coast Region. The Minerals Management Service reports that for the period August 26, 2005 through June 1, 2006, cumulative shut-in oil production was equivalent to 29.67 percent of the yearly production of oil in the Gulf of Mexico. Although substantial improvement has been made in reconstruction of the Gulf Coast oil production infrastructure, the impact of the 2004 and 2005 hurricanes has had a significant impact on crude oil supply and prices.³

*Table includes all countries that imported more than one million Bbl/d net in 2004.
Source: Crude Oil and Total Petroleum Imports Top 15 Countries, March 2006 Import Highlights: Released on May 25, 2006, EIA

Uncertainty in future supplies has also worked in conjunction with demand increases to force higher prices for crude oil. With the exception of Germany, all of the countries in Table 3 exhibited steady growth in crude oil consumption over the past 10 to 15 years. Germany's consumption declined due to strategic investments in alternative energy such as wind and biodiesel. India and China have shown high sustained growth in energy demand, and are recent additions to the list of top ten countries importing crude oil.

China and India are the most populous countries in the world and are also among the countries with the fastest growing economies. This economic growth is fueling a rapid increase in energy consumption, particularly fossil fuels. As illustrated in Table 5, the rate of growth in oil consumption in China and India has conspicuosly outpaced the rest of the world. In fact, China and India alone account for about one-third of the total world increase in oil demand over the period 1995 to 2005. Their combined average annual rate of growth is nearly 7 percent compared to less than 2 percent for the rest of the world.

Source: International Energy Annual 2003, Table 1.2, EIA; 2006 International Petroleum Monthly, Table 1.7, EIA

Over the same period, petroleum product demand has increased dramatically. This is demonstrated by increased inputs of crude oil to refineries. The result is tighter gasoline supplies and higher prices. Similarly, U.S. refinery capacity has remained nearly unchanged in recent years and utilization rates continue to be at near capacity. This, combined with high prices of crude oil feedstocks, has translated into higher prices for all petroleum products such as motor gasoline and diesel fuel.

The Biofuels Solution
As prices continue to rise alternative solutions must be pursued. Biofuels offer a solution in which some countries have already begun to successfully implement.

• In the U.S., biofuels are a key component of the President's Advanced Energy Initiative and will help to reduce 30 percent of 2004 levels of gasoline consumption by 2030. The U.S. is currently the world's second largest producer of ethanol at 4.28 billion gallons, accounting for 44.5 percent of world ethanol production.⁴
• Brazil has been successful in supplying its fuel needs through sugarcane-to-ethanol. In 2005, Brazil produced 4.36 billion gallons of fuel ethanol, 45.2 percent of the world's total. Ethanol provides roughly 40 percent of Brazil's non-diesel fuel and 2 to 3 percent of U.S. non-diesel fuel.
• Biodiesel, produced mainly from rapeseed or sunflower seed, comprises 80 percent of Europe's total biofuel production. The EU accounted for nearly 89 percent of all biodiesel production worldwide in 2005. Germany has been very successful integrating biodiesel into its transportation sector, producing 1.9 billion liters, or more than half the world total.⁵
• As of early 2006, Columbia is mandating the use of 10 percent ethanol in all gasoline sold in cities with populations exceeding 500,000.
• In Canada, the government aims for 45 percent of the country's gasoline consumption to contain 10 percent ethanol by 2010.

Biofuels will help foster a new transportation infrastructure, domestic energy production, rural economic growth and increased energy security. Biofuels also offer a greener alternative, through reductions in greenhouse gas emissions. Continued development of biofuels will provide a path for long-term sustainable development in the United States.

¹The United States peak oil production was in the late 1970s.
²An important note is that although the United States has not purchased oil from Iran since the government enacted sanctions in the early 1990s the events in Iran affect world oil prices which U.S. consumers must absorb.
³The News Room. Release: #3521, Minerals Management Service, http://www.mms.gov/ooc/press/2006/press0605.htm, June 5, 2006
⁴Biofuels for Transportation: Selected Trends and Facts, World Watch Institute, http://www.worldwatch.org/node/4081, June 9, 2006.
⁵Biofuels for Transportation: Selected Trends and Facts, World Watch Institute, http://www.worldwatch.org/node/4081, June 9, 2006.