What, Me Worry About Gas Prices? ... Part II

Editor's Note: This item was originally posted in May of 2006. After reading it through the other day it's amazing how much it still makes sense and how little has been done to implement any of its suggestions. We have a Democratic Congress to thank for that. So, except for the fact that $3/gallon gas is now more like $4/gallon gas, this still hits home. And with an election quickly approaching, now is the time to contact your Representatives, Senators, and those candidates who are challenging them to find out where they stand on these issues. I also invite you to check out John Stossel's Town Hall articles on Energy Independence (Part I & II).

I very seldom worry about the price of anything.

If I need it, I get it either where it's most convenience or from a quality source. The old adage of "you get what you pay for" really is accurate.

If I don't need it, but just want it, then I'm a little more selective. I wanted a new flat panel TV but I didn't want to spend more than $2000 for it. I found one I liked but it was about $2400. Did I buy it? Nope ... I waited for the price to come down. And sure enough, as with most electronics, the price came down. When it dropped below $2000, I bought it.

I live on a dirt road in a fairly rural area about an hour or so outside of Washington, DC. As my chosen profession doesn't really lend itself to be conducted in my local setting, I need to commute about 42 miles each way to my job. There is no available public transportation and I only know of one co-worker who lives anywhere near me. Given my responsibilities to get my kids from one after-school activity to another, I can't really car-pool. So, my only real choice (short of moving or changing jobs ... which are, of course, choices) for getting to and from work is to commute in my car, by myself. With gasoline close to $3/gallon, I spend about $50/week in gasoline. If it were $2/gallon, I spend about $34/week. Have I changed anything about my lifestyle to adjust to this recent increase in gas prices? Hardly. Do I gas shop? Nope. When I need it, I need it and I usually get it where it's most convenient.

Why do I bother talking about this? Well, it seems to me that people are getting real bent out of shape over rising gas prices for really no reason. I think people just like to complain ... plus they're incredibly ignorant of how the market forces impact the price of goods and services. Take that TV I bought. As technology advances, the prices of goods and services produced by that technology have always tended to drop. Remember when a personal computer cost about $3000? I even bought one at that price.

So, what drives the price of something like gasoline ... let's see, the price of barrel of crude oil, the cost to refine the oil into gasoline, the cost to transport the oil to the refinery and the gasoline to the gas station, and, oh yes, all of the taxes that the local, state, and federal government levy at the pump. Supply and demand also comes into play. When supply is low and demand is high, prices go up. When supply is high and demand is low, prices come down. Basic economics. So, what's our current situation with respect to having gasoline show up at the pump? Let's take a look ...

1. Demand is very high.
Americans are driving more than ever. Overseas demand is through the roof with China and India being the biggest culprits.

2. Crude Oil Costs.
Crude oil is a commodity that is traded on world markets. The current price of a barrel of oil is at an all-time high.

3. Supply is lower than normal.
Why? A couple of reasons ... Katrina effects and Blending. Oil refineries, like all chemical and mechanical manufacturing operations, require routine maintenance. Some can be done with the refinery in operation, some require short, periodic, shut-downs. When Katrina hit, refineries that weren't impacted stepped up production to help pick up the slack and deferred maintenance. Blending is the process of reconfiguring the refinery to produce a different mixture of gasoline. This is in response to environmental requirements that MTBE, ethanol, and other additives need to be included in the gasoline to assist with limiting fuel emissions during the summer months. A refinery needs to temporary halt production to make this change. Combine these two factors with two other factors (refinery capacity hasn't increased in the US in 30 years, refining is the bottleneck in the process of turning oil into gasoline), and you have a lower supply than is normally available at this time of year.

The result of all of this ... higher prices.

But what about "record" oil company profits? The dollar value might be a record - after all, demand is high, they can sell as much as they can produce - but their profit margin of 8% (8 cents per dollar of gasoline sold) is not only historically low for the oil industry but is also low when compared with other industries. Besides, when I heard about these "record" profits, I bought stock in ExxonMobil. Why not share in the rewards?

So, what can be done to with our current supply of gasoline in order to reduce prices? Many things ... as it turns out.

• Reduce Demand. If you don't like the prices, drive less ... or get a more fuel efficient car.
• Lobby your Representatives to reduce fuel taxes. Nearly 50 cents on every gallon of gas is some type of tax. Now, these taxes supposedly go for things like road construction and maintainence, so if they are reduced, don't start complaining about the poor quality of the roads. They are related.

Some things that won't work ....

• Tax the Nasty Oil Companies More so that we can all get rebates to help us pay for more gas. While this sounds great, it has really bad consequences. Let's say that this happens ... what would the oil companies do? Well, they'd raise their prices to account for the additional cost of doing business that has been imposed on them by the government. Then, the government would need to hire more people to staff a new bureaucratic organization to administer this new program. They need to be paid and that money would be taken out of the new tax that was collected. If all of the remaining funds were then distributed (based upon what criterion?) to consumers, guess what? The amount you received probably wouldn't be enough to make up for the increase in the price due to the tax being imposed on the oil companies. Bottom line ... you, the consumer, lose. And the only one who wins is the government ... they get to hire more people.

There really is nothing that can be done in the short term (other than reduction in the tax component of the price) to help the issue. What can we do long term?

1. Increase Oil Production. Start drilling in places that we know oil exists but have been placed off limits due to environmental concerns. This would include Alaska, the Gulf of Mexico, off the coasts of Florida and California. Worried about the environment? Yeah, me too. But, how many caribou did the Alaskan pipeline extinguish? When was the last time there was an oil rig spill in our current offshore wells? You can't complain about prices and continue to thwart the production of additional resources.
2. Nuclear Power. Quick question ... what exactly was the disaster at Three Mile Island? Was radiation released? Did people die of radiation poisoning? Do people still live within sight of the plant? I think you know the answers to this one. There has never, ever been a nuclear power plant incident within the US where radiation was released into the atmosphere. Never! If we could use nuclear, wind, hydro-electric, and other alternative sources of power to supply our electrical needs, how much more oil would that make available to be converted into gasoline? A whole hell of a lot. And, what would that do to the price of electricity? It would drop significantly and everyone who is currently using heating oil would be rushing out to convert to electric heat. The impact this would have on the gasoline supply is staggering.
3. Build more Oil Refineries. This is the bottle neck of the supply chain. Even if we had billions of more barrels of oil, we wouldn't have any more supply unless we increase our refining capacity. There hasn't been a new refinery built in the US in 30 years. Why? It costs too much and there's very little return. Why? Environmental regulations. When was the last time you heard about a refinery accident that killed hundreds of people and wildlife? As with offshore oil drilling, the technology for refineries has advanced to the point where accidents have been practically eliminated. Now I realize you can't account for human stupidity. There will always be "Homer Simpsons" in the world. Hopefully we're not hiring them to work at nuclear plants or oil refineries.
4. Alternative Fuels Research. Step up public and private funding for research into alternative fuels such as hydrogen, ethanol, shale oil, etc.

On thing is for certain ... until we enact some of these long-term plans, the price of a gallon of gas will continue to go up and down ... probably more up than down. And people will continue to whine and yet fight efforts to enact this, common sense, stategy. Hey, but look at the bright side ... we could be paying $6/gallon like those European weanies.

And, one parting question ... Why aren't liberals ecstatic at high gas prices?