Wednesday, May 03, 2006


It's Time to Get Over Gas Prices

A Problem of Our Own Making...

Well the ongoing 24/7 coverage of rising gas prices continues. Panic, Panic, Panic. Even the government seems to be getting in on the panic action. (Here, and Here) But let's get real here for a moment shall we. There are many reasons for the rise in gas prices, some we control others we do not, and one thing is for certain, that any knee jerk reaction and cries for government assistance will only make things worse. So let's take a look at why gas is expensive and what we could reasonably do about it.

First off, gas is not at a record price (although it may soon be). See here. Anyway, looking at this chart you'll see that the relative price of gas is fairly stable, only increasing recently. But of course that is cold comfort when you're shelling out $60 to fill your tank twice a week.

Why is gas so expensive:

As mentioned above gas is currently expensive for several reasons:

Instability in Oil Producing Nations: First and foremost seems to be international instability in oil producing nations. Iran is crazy for the nukes, Iraq...well we all know how well that's going, Venezuela seems intent on becoming the next Cuba, Nigeria is coping with banditry and so on. This instability has led to a premium on gas as there is now a stronger likelihood that supply could be interrupted.

China and India:The world's two most populous nations are growing like weeds, becoming richer, buying more cars and are now competing with us for these resources. More gas usage means higher demand, higher demand means higher prices.

The Falling Dollar: It's often said that deficits don't matter. Well, they do matter. The record sending by the current administration has double that U.S. national debt in the past five years. As a result the U.S. Dollar has declined versus other around 20 to 30%. Oil is priced in dollars, so if an oil producing nation wants to make the same profit on its oil, priced in dollars, prices have to rise.

Your SUV: Just like back in the 1970s, we all love driving our monster SUV's and muscle cars. Even your truly, when renting a car always goes for the Charger or the Jeep. I think it is great we can buy whatever car or truck we want, but we shouldn't be surprised when we use more gas because we drive less efficient cars.

Federal Clean Air Regulations: Under current clean air regs. Refineries are mandated to switch from winter blended fuels, to cleaner summer burning fuels to reduce smog. No problem there. But the clean fuel blends differ from region to region. California has one formulation, the Midwest another and so on for other parts of the country. This creates supply bottlenecks and shortages in one market (say California) can not be mitigated by supplies from other states. Also, due to strict clean air act regs, it is virtually impossible to build a new refinery in the U.S. so the ones we still have are old and working 24/7 to meet ever growing demands.

What can we do about it?

First, we must accept that there is very little the government can do regarding gas prices in the short term. In fact government intervention would likely cause more harm than good in the short, medium, and long term. But, there are things we as voter, consumers and a nation could do that would get oil prices back under control, or at least give us more control over our energy prices. The question is are they worth it and would you be willing to live with them?

Harmonize Summer Blend Regulations (or eliminate them): As mentioned above the current market for summer fuels is fragmented. Every Spring this creates supply bottlenecks that cause price spikes. These various summer formulas should be harmonized to de-balkanize the market place, or perhaps temporarily suspended (I think Bush has done the later...good for him). If air quality issues trump other concerns, don't complain about the resulting costs.

Drive More Fuel Efficient Cars: There is a lot of interesting technology out there (Hybrids and such), but there is no need to even shell out the extra money for a hybrid. Next time your in the market for a car, buy something a bit more fuel efficient than your current mini-van our SUV. Just switching one of your cars to something more efficient will help curb demand.

Reimpose the 55 MPH Speed Limit: Believe it or not, this nationwide policy from the Carter years was instrumental in breaking the OPEC cartels pricing power back in the late 1970s and early 1980s. In fact OPEC was so crippled (cartels are inherently unstable anyway), that we had nearly 20 years of cheap gas, lasting well into the 1990s. As recently as the late 1990s, even the Economist magazine was predicting oil at $5/bbl. Imposing the 55 MPH speed limit would increase fuel efficiency and curb demand. I wouldn't be surprised that within hours of announcing a return to this policy that oil would drop in price by $10 to $15 a barrel. (Seriously!)
Get our Fiscal House in Order: Think gas is expensive today? What happens if the dollar looses even more of its value? To finance our federal deficit spending the U.S. needs to attract $2 Billion a day in foreign investment. If that investment dried up, or if China and Japan (who buy most of our national debt) stop buying our bonds, the dollar could collapse (think $12 gal gas), even the best and most likely scenarios project that the dollar will decline by up to 40% over the midterm if you don't get our finances in order. I don't know the relationship between the value of the dollar and the price of gas at the pump...but a 40% decline in the dollar would no doubt push prices up even more.

Explore Realistic Alternative Fuels: This year Brazil will stop importing gasoline, having successfully implemented a national ethanol policy. (more on that here). We could probably do the same, or at least look into that and other alternative fuels. Popular Science has the ins and outs of that here.

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