Why Are Gas Prices So High?

on Thursday, May 29, 2008

It’s hard to turn on the TV or radio or read a newspaper these days without hearing someone complaining about high gas prices. But the more I listen, the more I realize that these people have no clue what they’re talking about. In fact, in most cases, they seem to be venting their frustrations towards the wrong people.

In light of all this, I’ve decided to clearly state once and for all the REAL reasons gas prices are so high. Some of these reasons may not be unfamiliar to you, but some reasons listed here may actually surprise you...

To begin, we must all first understand that oil is traded on a world market – just like stocks, gold, and wheat are. As such, the price for the commodity is largely a factor of the global supply of it and the global demand for it. Think of it this way, if there was a shortage of wheat in the world, or if the global demand for wheat suddenly doubled, what do you think would happen to the global price of wheat? Not surprisingly, you would probably expect it to go up. Increased demand coupled with decreased supply will always result in higher prices for that commodity. Always. And so it is with oil. Countries like China and India have doubled their demand for oil within just the last few years. But we aren’t drilling enough oil to keep up with the rising demand. In fact, recent estimates state that globally we only produce 85 million barrels of oil per day, yet we currently demand 87 million. According to one oil company executive who recently was called on to testify (again) to Congress, if all is working to capacity we only have about a 3% spare capacity worldwide. The worldwide demand continues to rise as over 1 billion of the world’s population have a standard of living similar to ours, and there are billions more who would like to. As the worldwide demand continues to rise, there is no room for error. Any disruption or perceived threat of disruption has a significant impact on pricing. Economic factors such as these have pushed the price of oil up (as of this writing) to the $135/barrel mark.

Now the key to fully understanding all of this is to recognize that oil prices are NOT controlled by the oil companies. Crude oil prices are set by the world market factors listed above.

Are we all clear up to this point?... Good.

Unfortunately, many of our Ivy-League educated politicians have, for some unknown reason, not yet learned this simple fact and, instead, have decided to penalize the oil companies as if it will offer some sort of fix to the problem. Several Democrats in Congress have motioned that oil companies should be heavily taxed and prevented from receiving good profits. One Democratic Congresswoman, taking a page from the book on Socialism, even recently suggested that our government should nationalize the entire oil industry and just run oil by itself.

There are several problems with this: First of all, since when has the government ever been able to manage anything effectively? Remember how well they managed your social security? What in the world makes them think that they can run oil more efficiently than a competitive capitalist market can? A secondly, how does taxing the oil companies fix the problem? Remember, the underlying problem here is that we simply don’t have enough oil. Taxing some corporation or taking away profits isn’t going to produce a single drop, and therefore, doesn’t offer any sort of solution to the oil shortage problem. It should also be remembered that oil companies use their profits for exploration to find more oil reserves. Taking those profits away from them would reduce the money available for worldwide exploration and production and would be a death blow to the entire industry. Without exploration, we would be out of oil in just a few short decades. What then?

So at this point you may be asking, “Well then, smart guy, just how do we lower the price of oil?” There are several answers to that question, all of which I will ultimately address, but the most effective solution is simpler than you might expect: Either increase supply or decrease demand. In this situation we need to do both, although significantly decreasing global demand for oil is probably not going to happen soon, so the only option we have left at this time is to drill for more oil, thereby increasing our supply of it.

That’s the key to lowering current oil prices – Producing more oil! And seeing how the price of crude oil constitutes for roughly 80% of the price you pay for gas at the pump, you can see why that's important.

Estimates state that there is more oil in Southern Utah, Texas, Alaska, and off the coasts of Florida and California than there is in all of the discovered oil deposits in the world combined – but your government won’t let us drill any of it. Just to put that into perspective, Venezuela, whose government allows them to drill their own oil, is currently enjoying prices around 14 cents a gallon after subsidies! Many other countries in Asia and the Middle East that drill their own oil pay less than $1.50 per gallon. In fact, a neighbor of mine who is currently living in the Middle East emailed to say that she just filled up her large SUV for $14. There are other factors involved in lower regional prices amongst other countries as well, but the fact remains - drilling more oil reduces regional prices.

So if these oil-independent countries are enjoying such low prices partially because of drilling their own oil you may be asking, “Why in the world aren’t we doing that?” It’s quite simple really, your government is doing every possible thing they can to prevent it. While Congress is pointing the finger at everyone else for high gas prices, I've decided to include a comprehensive list of all the things your government is doing to “help” lower fuel costs:

1) Your government doesn’t want to drill in ANWR Alaska, which is the location of the second largest oil discovery in U.S. history. Back in the mid-90s, President Clinton signed legislation that prevented us from drilling in ANWR arguing that it would be 10 years until we would even see a drop of that oil. Well guess what, Mr. Clinton, it’s been 10 years now and had you not signed that legislation, we would be enjoying the benefits of those oil reserves right now. Way to go! Environmentalist zealots also argue that we would disturb the environment in ANWR should we drill there. Here, take a look for yourself:

That, my friends, is ANWR, which as you can see is nothing more than a patch of barren tundra. There isn’t even a tree within 700 miles of the area. What environment would we be disturbing? There’s nothing there! Now the most frustrating part in all this is that your lousy politicians are purposely lying to you when it comes to projected price drops from drilling in ANWR. For example, Democratic Congressman Chuck Shumer recently stated that if we drill in ANWR at a one million barrel/day output it would only reduce the price per gallon one penny. Yet just last week he stated that if President Bush can talk the Saudis into increasing output another one million barrels/day (the same output as ANWR), it will lower the price per gallon almost $0.65! Why the difference in prices, Chuck? Is oil from Saudi Arabia somehow more magical than oil from America? Look, the fact is drilling in ANWR WILL reduce the price at the pump, but your government is refusing to allow it.

2) Your government is beholden to a very small group of environmentalists that don’t want to disturb the caribou in Alaska by drilling there. It seems they would rather you pay 4 bucks a gallon than disturb some caribou which means you are, on average, “donating” $350 a month to the “Save a Few Caribou in Alaska Fund”… Hope it’s worth it! And for the record, the caribou population has thrived and increased ever since the nearby Alaska North Slope oil has been in production.

3) We have plenty of oil off the coast of Florida, but your government won’t let us touch it.

4) We have plenty of oil off the coast of California, but your government won’t let us touch it.

5) Your government is preventing the exploration of oil almost everywhere in America. Also, 2/3 of America’s federal lands are off-limits to drilling, as is almost all of the Outer Continental Shelf.

6) Right now, Cuba, India, China, and Venezuela are purchasing 100-year leases which allow them to drill in the Gulf of Mexico, but your government is not allowing us to purchase any of those new leases.

7) Your government is currently shutting down oil fields in Colorado.

8) Your government, because of permitting challenges and environmental restrictions, hasn’t allowed us to build a new refinery in about 35 years and operational refineries in the U.S. have been cut in half since the early 1980s. However, it would only be fair to mention that many of those remaining refineries have been added to and expanded over the last 30 years.

9) Your state governments require roughly 20 different blends (or recipes) of gasoline which makes it impossible to ship certain gasoline reserves during catastrophes or other shortages which can drive the price you pay up even more.

10) At a time when prices had already begun to rise, your Congress thought it would be a good idea to increase taxes on oil producers. Taxes are a cost that must be managed and they are managed by passing them along to consumers, thereby increasing the price you pay at the pump.

11) Since the Great Depression we have had the technology to convert coal into oil. But, once again, your government doesn’t allow it. They have also blocked the opening of shale oil fields in numerous states nationwide and, just last week, passed legislation to keep it that way.

And yet somehow, after all that, your government is curious as to why gas prices are so high...

Please don’t allow yourself to be foolishly misled. Your government has blocked every single opportunity we have had to lower oil prices in the last 30 years. But instead of loosening restrictions on our own oil supplies when increased future demand from India and China was beginning to occur, Congress decided to tighten them instead. Drilling our own oil is estimated to cut the current price for a barrel of oil in half, and the only ones preventing that from happening are your politicians in Washington. If anyone should be pointing the finger at someone for high gas prices, it should be Congress - - pointing the finger at themselves.

This is Part 1 of a 3-part series on gas prices. Part 2 can be found here.


Anonymous said...

FINALLY!! someone else who calls it like it is... I have been saying it for years only to have people say I am crazy...our "government wouldn't do that to us" OH REALLY!! Well they have , they are and they did... hope you enjoy working 2 jobs to pay for gas... I know I sure as hell don't but am finding it nessesary and as a single mom...it's tough enough...NOW....who is gonna raise my kids so I can pay for gas to get to work???and work 2 jobs to pay for gas???? JEEZE!!

Anonymous said...

If the gas prices are controlled by the global market, why is the price of gas less than a dollar a gallon in some of the oil producing countries (besides USA)? Please post the price of gas per gallon in every single country, and it doesn't look quite the same all the way across the board. Blow some more smoke.

Mike said...

That's the only ammo you got to try and debunk my post?!?!
Sad, just sad...

Go back and actually read the post correctly this time before making yourself look uneducated.

I specifially said "other factors are involved as well" while adding that "drilling for more oil will always reduce regional prices", which makes your comment completely irrelevant and, therefore, pointless.

Also, next time, instead of taking the cowardly aproach, try using your real name instead of "anonymous"