Mar
21
Why Gasoline is Expensive
March 21, 2012 | 5 Comments
A Guest Post by Paul Driessen
Writer and Columnist Paul Driessen
Edits in Italics.
When President Obama took office, regular gasoline cost $1.85 a gallon. Now its hit $4.00 per gallon in many cities, and some analysts predict it could reach $5.00 or more this summer. Filling your tank could soon slam you for $75-$90.
This winter was warm. Our economy remains weak. People are driving less, in cars that get better mileage, even with mandatory 10% ethanol. Gasoline is plentiful. Misinformed politicians and pundits say prices should be falling. They claim our pain at the pump is due to greedy speculators and greedier oil companies that are exporting oil and refined products.
Their explanation is superficially plausible – but wrong.
Energy Information Administration (EIA) data show that 76% of what we pay for gasoline is determined by world crude oil prices; 12% is federal and state taxes; 6% is refining; and 6% is marketing and distribution. Global markets set the price that refiners pay for crude oil.
World prices are driven by supply and demand, and unstable global politics. That means today’s prices are significantly affected by expectations and fears about tomorrow.
A major factor is Asia’s growing appetite for oil – coupled with America’s refusal to produce more of its own petroleum.
Prices are also whipsawed by uncertainty over potential supply disruptions, due to drilling accidents and warfare in Nigeria; disputes in Syria, Yemen and Israeli-Palestinian territories; erroneous reports of a pipeline explosion in Saudi Arabia; concern about attacks on Middle East oil pipelines and processing centers; and new Western sanctions on Iran over its nuclear program and the mullahs’ threats to close the Straits of Hormuz.
Amid this uncertainty and unrest, speculators try to forecast future prices and price shocks, pay less today for crude oil that could cost more four weeks hence, and get the best possible price for clients who need reliable supplies. When they’re wrong, speculators end up buying high, selling low and losing money. Oil speculators play a vital role, just as they do in corn and other commodities futures markets.
Today demand competes for oil instead of supply competing for buyers.
Moreover, oil is priced in US dollars, and the Federal Reserve’s easy money, low interest policies called quantitative easing – combined with massive US indebtedness – have weakened the dollar’s value. It now costs refineries more dollars to buy a barrel of crude than it did three years ago.
Compared to safe haven currencies like the Swiss frank the dollar is down by 35% in three years. Oil for those with strong currencies seems cheap.
US Dollar vs Swiss Franc 2007 to Mar 2012
Basic chemistry dictates that a barrel of crude (42 gallons) cannot be converted entirely into gasoline. Depending on the type of crude, some 140 refineries across the USA transform each barrel into gasoline, diesel, and jet fuel, heating oil, asphalt, waxes, petrochemicals and other essential products.
This manufacturing process leaves them with excess diesel fuel, because American vehicles consume less diesel than refineries produce – due to air pollution laws that limit diesel use. US refineries export that excess diesel to Europe, which uses more diesel than gasoline, and Europeans ship their surplus gasoline to mostly East Coast consumers. US refineries also sell excess inventories of other manufactured products to overseas markets, but diesel is by far their principal export.
America exports $180 billion in finished products every month – $2.2 trillion annually in corn, wheat, cars, tractors, appliances, airplanes, pharmaceuticals and much more.
Last year, for the first time since 1949, America was a net exporter of fuel and other petroleum products. Those exports injected $107 billion into our economy and sustained thousands of refinery and other jobs that otherwise might have been lost, as refineries also struggled in our stagnant economy.
Farm and factory jobs would evaporate if we made exporting their products illegal. Prohibiting fuel exports, and demanding that refineries manufacture only what we need here in the States, would have the same effects on our employment, economy and living standards.
The USA has 1.4 trillion barrels of technically recoverable conventional oil, the EIA and other experts estimate, and enormous additional supplies in shale and tight sand deposits. The best way to keep prices down is to produce more of this American oil, and import more from secure, friendly, nearby suppliers like Canada.
However, our government prohibits leasing and drilling on nearly 95% of the onshore and offshore lands it controls. It is dragging its feet on leases and permits for the remaining 5% and over-regulating production on private lands. It vetoed the Canada-to-US Keystone XL pipeline. It is imposing layers of costly and unnecessary new regulations on every aspect of energy production it does not simply reject.
All these government policies impact the price we pay at the pump.
We are losing billions of dollars in bonus, rent, royalty and tax receipts, killing countless jobs, and impairing Americans’ living standards, health and welfare.
“More exports mean more jobs,” President Obama said recently. “We need to strengthen American manufacturing. We need to invest in American-made energy and new skills for American workers.”
His words ring hollow. Above all, President Obama and his environmentalist and congressional allies want to end our “addiction” to oil, “fundamentally transform” America, and “invest” billions of dollars (borrowed from us and our children and grandchildren) subsidizing efforts to turn corn, switchgrass, algae and pond scum into fuel.
Generating billions of dollars and millions of real jobs by producing American oil and manufacturing American oil products doesn’t fit this agenda. Even though one of every ten jobs created in the last three years has been in oil and gas, when it comes to petroleum, Team Obama wants to punish success, and reward failures like Solyndra, Fisker and the Chevy Volt.
To paraphrase a recent White House jab at Republicans who want more drilling and fewer obstructionist regulations: Every time prices start to go up, President Obama heads down to the local pond or cornfield, makes sure a few cameras are following him, and starts acting like he can wave a magic wand, throw a few more billions around, and have cheap, eco-friendly biofuels forever.
Meanwhile, Energy Secretary Steven Chu has made it abundantly clear that he wants to “boost gasoline prices to European levels” – $8 to $10 per gallon! He’s already half way to his goal.
Those prices would certainly force Americans to drive less, and “hope” the hype about “changing” to algae-gas becomes reality in less than twenty or thirty years.
Meanwhile, skyrocketing fuel prices will certainly “boost” the cost of transporting people, raw materials, food and products by wheels, wings and waterways; manufacturing anything still made in America; and preserving jobs, family and business budgets, and dreams that depend on affordable energy.
Hunting for scapegoats won’t lower pump prices. Reality-based energy policies will.
Mr. Driessen is senior policy advisor for the Committee For A Constructive Tomorrow and Congress of Racial Equality, and author of Eco-Imperialism: Green power – Black Death.
Mr. Driessen covered the major points with aplomb. The few remarks that seem a bit overboard disparage the alternative fuels. We all know the alternatives are going to need to face petroleum head on by price. The few remarks that seem weak don’t pound the current administration hard enough for their complicity in the situation. Mr. Driessen completely ignors the mainstream press overlooking the situation and informing people in and honest and straightforward way.
The hard fact is the devalued dollar is the principle driver of the high price of crude oil products for Americans.
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Interesting points especially when it come to the weak dollar.
As for diesel, diesel engines aren’t popular here due to cost not due to environmental laws. Most trucks are burning it. Am I wrong on this?
Gasoline is energy dense, easy to use and available. That is why we will continue to use it until a substitute is found.
Unfortunately, I do not envision a change in any of the circumstances and policies that are pushing up the price of gas. This administration will have a party when the price hits $5 a gallon – because that has been a Democrat goal for the last 20 years.
The bad news – the price of electricity is going up next. In a second term – this Administration will seek to close coal power plants. And, Chu and Obama will take away your Air Conditioner by making it too expensive to use.
“America exports $180 billion in finished products every month – $2.2 trillion annually in corn, wheat, cars, tractors, appliances, airplanes, pharmaceuticals and much more.”
“A major factor is Asia’s growing appetite for oil – coupled with America’s refusal to produce more of its own petroleum.”
Doesn’t it look then like America is feeding the same monster it wants to fight, meaning it is creating the appetite and demand other nations have for oil and indirectly causing worldwide prices to go up?
Exporting a fossil fuel only economic model without alternatives will keep boosting prices. Demand would be destined to outpace supply. You would need to find vast oil fields at a faster pace and that seems unlikely to me.
The only reason diesel costs more here is because of government regulations. For years it was cheaper. But in an effort to reduce its use the regulations are piled on. The reason it is used in big trucks is that the power needed to deliver the payload down the road would take more gallons per mile using gasoline. Besides the life span of a gasoline engine is shorter.
Unfortunately what appears to be a well-thought out fact based article on energy is nothing more than political propoganda.
Paul Driessen begins his post by pointing out that gas averaged $1.85 when Obama took office and is now about the $4.00 level. Well take a look at: http://gasbuddy.com/gb_retail_price_chart.aspx and tell me this isn’t cherry picking the data. (In particular check the ‘Show Crude Oil Price’) Just 6 months before Obama took office gas was at a all time high. There is not a lot of difference between the 4 years before and the 3 years since Obama took office is there?
And if the price of gasoline is determined by “world prices are driven by supply and demand, and unstable politics” how is it that the US can somehow magically lower world oil prices by drilling? We’ve heard the “Drill Baby Drill” refrain before.
Oil prices are being driven by world supply and demand AND speculators which belong in the “unstable politics” part of his pronouncement. This part of the price component should not be ignored or minimalized. Again take a look at the graph and explain this volatility purely on supply and demand concerns.
The US will be using petroleum energy based products for a very long time. The US has a good share of these resources but in far less proportion to it’s use especially when compared to the rest of the world’s supply and growing demand. Drilling for more oil and gas cannot be a long term solution. Environmental concerns cannot be ignored. The US must not wait till we run out of cheap oil (and yes even $100 oil is cheap) before we decide to change develop alternate energy sources.
This is a reality-based based energy policy. And beware of columnists spouting political propaganda disguised as facts.