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Sunday, April 16, 2006

The Truth About Gas Prices

A nice, compact article from USA Today about the economics behind rising summer gas prices here.

Some highlights:
  • Refining capacity is tight, and not all production lost due to the hurricanes is back online
  • Reformulation with ethanol instead of MTBE is raising prices
  • Fears of instability in Nigeria, Iran, and Venezuela add about $20/barrel to the price of oil
  • Speculation on commodities markets drives up the price as well
  • Oil companies are not gouging customers, but are making large profits while passing on the high price to consumers
  • Even with prices around $3/gallon, Americans aren't really changing their driving habits or car buying choices by much.
  • Federal and State taxes add an average of $0.46 per gallon, with large variations in state taxes.
So, how could we get lower gas prices? (My thoughts, not in article)
  • Production:
    • More exploration, more refining capacity. Drill in ANWR, drill offshore. Encourage refinery development.
    • But Democrats, "moderate" Republicans, and Greenies are against this, so not much is happening to increase domestic supply.
    • Depose Hugo Chavez, install a pro-capitalist government that will increase production. Nurture Iraqi oil production.
  • Regulation:
    • Force a common national fuel standard, or at least a split California/Federal two-formula standard to simplify fuel blending.
    • Have the EPA relax emissions regulations on diesel engines, to allow low cost diesel vehicles.
    • But California ARB and EPA have a higher priority on clean air than on fuel economy.
  • Conservation:
    • Americans could drive less, or buy smaller cars. Carpools.
    • But not a popular choice, apparently--witness weak sales of large hybrids, solid sales of pickup trucks and new GM SUVs.
  • Taxation:
    • Federal and State fuel taxes could be lowered, or deductions added for middle to low income taxpayers.
    • Yeah, just try to pry that dollar out of Uncle Sam's deathgrip!


Anonymous said...

The only argument that you pose that is of any value is conservation; driving less or buying more fuel efficient cars. Deposing foreign leaders is not a a great option (Iraq). Besides, think of all of the poor americans who would not have had heat in their homes this winter if Chavez did not send them free oil. Kind of a shame that a south american dictator has to "assist" poor citizens who live in the richest city in the richest country in the world, but that is another topic for you and Pat Robertson to debate.
Greenie idealism is problematic, but at least it pushes our industry (the auto industry) to move forward. OEM's and exhaust line manufacturers do have solutions to meet tough CAFE and EuroNorm standards. The process, as it stands today, is simply a matter of selecting the most efficient technology on the table.

If D-Rock does not move forward, than Silicon Valley will. Bill Gates and his pals are investing heavily in comapnies who are developing alternative energy sources. They changed the way we work, they may be the ones who have the creativity and intelligence to change the way we drive.

If we complain about high gas prices as being a problem, but don't change our consumption habits, is it really a problem?

In the interim, think Turbo-Diesel.

Anonymous said...

Another alternative would be for politicians to "grow some" and RAISE TAXES on the fuel.

Yeah, I hate taxes as much as the next guy, but a consumption-based tax is the ONLY way to address this directly. $5 or $6 gasoline will quickly cut consumption, and we could use the proceeds to fix roads or cut other taxes. I'm sure they'd find ways to spend it...

Probably notgonnahappen, but that's what SHOULD be done - IF fixing the situation is a priority (maybe it's not). Otherwise, we can all just wring our hands, and point fingers... current SOP in Washington.

Ari said...

"Yeah, I hate taxes as much as the next guy, but a consumption-based tax is the ONLY way to address this directly. $5 or $6 gasoline will quickly cut consumption, and we could use the proceeds to fix roads or cut other taxes."

The only problem for that is that all the industries that rely on transportation would suffer. Nevermind the cost of going to the grocery store to buy groceries, but what about the construction business that relies heavily on machinery and trucks to build houses, buildings, etc. Howabout the airline industry that will pretty much go bankrupt because of higher costs and the higher price of airline tickets. GM and Ford are already reeling from slower US sales, what would happen to those companies when the government raises fuel taxes?

Taxes are necessary, but should be modeled after the laffer curve and realize that simply raising taxes does not, in fact, rasie revenue all the time. Raising the price of gas to $5 or $6 might not actually bring more money in at all, seeing that most people will be forced to not drive.

Another problem is that this would hurt the middle class and the poor. The rich will obviously not have to worry about the higher price of gas as much as the poor or the middle class.

There are other problems, but I feel that these are the morst pertinent problem with the argument that simply raising the taxes on gasoline. There are far better ways of fixing this problem.

The way I see it, conservation (voluntary) and more production. Less regulation (the problem in the first place is 50 different regulations) can also help the problem.

Anonymous said...

"Oil companies are not gouging customers, but are making large profits while passing on the high price to consumers"

This just doesn't make sense. If you are passing on highe cost of crude then you wouldn't be making more profit from it!?! Your costs for that crude would be higher. I would like to see how the supply chain breaks down and who owns the crude at what points. From Earth to pump.

The Auto Prophet said...

The oil companies don't set prices for their oil. Since oil is a commodity traded on international markets, the only control oil companies really have on price is to limit supply, which is what OPEC does.

When oil prices are high, profits go up because the price may not be tied to the cost of getting the stuff out of the ground. Conversely, when prices are low, oil companies can bleed very badly.

Sherrilyn said...

Nice piece. I'll pass it on.

Anonymous said...

Fact: More oil comes from Exxon owned wells than from Kuwait. Do they charge themselves $70 a barrel? Not likely.
Fact: The oil industry has collectively colluded to restrict refining capacity in order to artificially inflate prices through lower supplies of refined fuel. Shell attempted to close the most profitable refinery in America with the excuse that it was inefficient.
Fact: If the federal government stopped paying subsidies to farmers to not plant and had them plant a biomass fuel source crop, 10% of our energy needs would be met this year.
Multinational corportations led us down this road. They won't voluntarily give up the power and profits that we've given them.

Ari said...

"Fact: The oil industry has collectively colluded to restrict refining capacity in order to artificially inflate prices through lower supplies of refined fuel. Shell attempted to close the most profitable refinery in America with the excuse that it was inefficient."

Um, then why did Shell announce today that they were building the largest refinery in America? It will expand output by 325,000 barrells a day.

Shell unveils plans for 'biggest refinery in US'

Arkay said...

ExxonMobile makes 9 cent per every gallon for their profit.
Fed government takes about 20 cents per every gallon on their profit.

Let's say, ExxonMobile wiped out their 9 cents profit per gallon...

Price of Gas would be ...
instead $3.09 per gallon, it would be $3.00.
It won’t make any difference.

The federal government will still rake in 20+ cents per gallon regardless. Government doesn't dig up the oil, doesn't refine the oil, doesn't ship the oil, doesn't serve the oil, or doesn't market the oil. Yet, they rake in 18+ cents per gallon. And that's just taxes on gasoline on federal level. ExxonMobile pays 40% corporate tax on profits. So, ExxonMobiles of the world probably pays more than 20 cents per gallon. Then there are state taxes, county taxes, and city taxes, that can amount up to 50 cents per gallon.

Gas prices are determined at market level. ExxonMobile has no control over the price of crude oil, period. Prices are driven by the commodities pricing. This is very basic level of study of Economics.

So many people are so ill equipped with economics knowledge. No wonder, US students ranked at 26th in the world in Math and Science. Math and Science are the stuff that they supposedly teach every year. Economics is half semester course at best during latter high school year. If these under-educated students didn’t learn economics during their high school year, would they learn Economics during college year? Most college students at social science classes aren’t very bright either.

People believe hypes like biomass or biofuel. Biofuel is hardly a replacement for the oil. We have gasoline because it’s cheaper. Digging up the gasoline is cheaper than making biofuel out of cow-dungs or tree/plant pulps.

Raising taxes does not produce any more gases and it doesn’t relieve anything. It does nothing but to spread misery.

We had this argument during 2000. That’s when Dick Cheney had energy task force that liberals rejected. Remember the power outage northeast area? Lack of electric grid build up.

GM isn’t reeling with falling sales because of SUV. SUV pushed GM’s profit. Ford just has bad line of vehicles/SUVs. Ford is doing poorly in most of their vehicle segments.

People do not voluntary curve their way of life because someone wanted them to unless they have entirely different reasons, like religious conviction or some such… This is why study of Economics is a social science, not some regurgitated-for-the-test and forget-next-week education.

Their marginal profit isn’t lining up to their marginal cost. If you look at their revenue/profit reporting, you will see their profit is diminishing because they are incurring higher cost. They aren’t making more money. This is a classic economics 1301.

Please go back and read some principle of economics books about price, price determination, and role of pricing.

Poor Americans didn’t need energy assistant from Chavez. Poor in American is rich in Venezuela.

Anonymous said...

Read the article from the Washington Times that blows up the arguments against gas price controls and a "windfall profits" tax. Patrice Hill writes:
Because the tax was applied to U.S. oil producers but not international companies, the Congressional Research Service concluded that it had cut domestic production by 3 percent to 6 percent and increased oil imports by 8 percent to 16 percent.
In other words, the windfall profits tax was a windfall for the producers of foreign oil! That's just the kind of windfall that we should avoid. As I like to say, fact is the best argument for conservatism. In this case, the facts about past impacts of these big government programs provide a warning for today's politicians.

Anonymous said...

Blah Blah Blah! Bottom Line:
Oil Companies (Bush) record profits
Middle Class America suffers.
Read and post all you want, that is the basic fact. Can't be changed.

Anonymous said...

What a dump ass saying we need economics classes you need a lobotomy jackass. Record profits won't be made off of 9 cents a gall margin. They don't have to sell their own oil that they pump on the commodity exchange at all. The exchange is just that an exchange nothing more or less. I get tired of stupid ass college uneducated idiots like yourself think that you are being taught the truth in college. Perhaps you need an education in real life economics. Which basically means that people will screw anyone that they can to make money.

Anonymous said...

Any high school student could speak about the Fed allowed, individual oil company refinery manipulation to limit supply and prices. It is only illegal to band together with other oil companies and manipulate refinery output and prices. Refinery manipulation and commodity manipulation are in fact what is behind the highest prices yet in the US for gasoline and petroleum products. This is all being blessed by our full service station White House. Many in the Bush administration if you do not know, are directly connected to the oil industry, through past employment or as recipients of campaign millions. Label the industry flaks appropriately when you hear them on the tv or read them propagandizing the transnational profit line, "don't blame the oil companies, it's not their fault, it's you, the addicted consumer". Very transparent and despicable when lives are at stake.

Anonymous said...

Probably not the response you are looking for, but.....................

I love this subject for 2 reasons. One I genuinely believe what I say and write on the topic. And, two, it typically stirs up some debate.

It s easy to be appalled at the "disgustingly enormous" profits of the oil companies, but I don't think a lot of people think it all the way through. For example: When you buy a gallon of gas, 10-15 percent is tax, which is money that stays in the country and goes into the hands of the government for various purposes. The remainder of the cost of the gallon of gas does NOT go into the bank account of "Mr. Exxon", "Mr. Mobile", or "Mr. Shell". These big oil companies (Like BP) are owned by..............share holders.
The shareholders are made up of hundreds of thousand (maybe even millions) of people who have bought stock in the company. These are people like the girl who serves you coffee in the morning. The guy who cuts your hair. Or even the night shift security guard at WalMart. Etc,etc.
So if you want to get mad at somebody, get mad at the geek with the pocket protector in the Toyota Prius stuck next to you in traffic, because he is laughing his ass off at you and your Suburban all the way to work because he owns stock in an oil company.

By the way, on a side note, the more these share holders make on their BP stock, .............the more they SPEND. They spend their money on college education for their kids, cars, houses, TV's, goods & services. Which stimulates the economy and creates job, which (directly or in-directly) gives you somewhere to get up and go to every morning for work.

The folks in the Middle East are just a small cog in the gears of the cycle . And if, in the process of the oil product economic dynamic, they make some money too,...then so be it. They are no different then the guy in the Prius.

The other thing is, you hear people complain about the price of gas all day every day around the water cooler, on the TV, in the Newspaper, and on the radio. What they are failing to report or realize is:


In other the words, the reason why the oil companies are charging $4.50 a gallon is because ......................they can. And they can'll pay it. Period.

The price of all goods and services is dictated BY THE CONSUMER, not the manufacturer. (See Economics 101)

Some day, when the majority of the population finds an EFFECTIVE way to consume less fuel as a nation, the cost of fuel will drop.

Other than that (and barring the development of an alternative fuel that does not require the entire surface of the earth to be covered in corn fields so it can supply fuel to a city the size of L.A. for less than a year.), the price will continue to increase.