Gas costs too much; here’s why

The Washington Times Daily - - Politics -

Gaso­line is in plen­ti­ful sup­ply. De­mand is fall­ing. So why are prices at the pump go­ing through the roof — up nearly 30 cents a gal­lon in the past month alone? A num­ber of rea­sons, ac­tu­ally. Most of what dic­tates the price of gas is the price of oil. The En­ergy In­for­ma­tion Ad­min­is­tra­tion re­ports that in Jan­uary, crude oil prices ac­counted for 76 per­cent of the price of a gal­lon of gas. Ex­cise taxes, re­fin­ing costs and re­tail/dis­tri­bu­tion made up the rest.

Crude is sold in the global mar­ket. Though U.S. de­mand has fallen be­cause of a weak econ­omy and a warm win­ter, China and In­dia are buy­ing crude at a blis­ter­ing clip. Asia sur­passed North Amer­ica as the world’s largest petroleum­con­sum­ing con­ti­nent in 2008. And that con­sump­tion will only in­crease as China’s and In­dia’s eco­nomic growth con­tin­ues to out­pace ours.

In­creased de­mand from Asia has steadily pushed up oil prices. But re­cently, other fac­tors have con­spired to drive prices even higher. The most no­table of these: Iran’s threat to re­strict oil ex­ports to Europe and block the Strait of Hor­muz, caus­ing pro­duc­ers to stock­pile in case of a ma­jor sup­ply dis­rup­tion.

Such a dra­matic an­nounce­ment also fu­els spec­u­la­tion. When the mar­ket an­tic­i­pates higher prices in the fu­ture — say in Europe — pro­duc­ers may take some oil off the mar­ket and wait to sell it later. But spec­u­la­tors and pro­duc­ers can­not con­trol long-term pric­ing. At some point, they have to un­load their in­ven­to­ries

(Note to Congress and the pres­i­dent: Just as spec­u­la­tors can drive up prices near-term, so they can drive down near-term prices on ex­pec­ta­tions that more oil will reach the mar­ket. Moral: New drilling can af­fect the price of oil sooner than the 10 years it may take for the crude it­self to reach the mar­ket.)

The Fed­eral Re­serve also de­serves its share of blame. Oil trades in U.S. dol­lars, and the Fed’s easy-money pol­icy has weak­ened the value of the dol­lar. It now takes more dol­lars to buy the same amount of oil in the U.S.

Many peo­ple want to blame the Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries be­cause the car­tel sets pro­duc­tion tar­gets based on es­ti­mates of fu­ture sup­ply and de­mand. For­tu­nately, OPEC is not a very strong car­tel. Mem­ber coun­tries of­ten ig­nore pro­duc­tion tar­gets and pro­duce more to cap­ture more profit. Cur­rently, OPEC’S out­put is at a three-year high.

Washington could nudge gas prices lower if it wanted. For starters, the ad­min­is­tra­tion could re­verse poli­cies that have led spec­u­la­tors to be­lieve En­ergy Sec­re­tary Steven Chu still clings to his 2008 po­si­tion that, “Some­how, we have to fig­ure out how to boost the price of gaso­line to the lev­els in Europe,” where it costs $8 to $10 a gal­lon.

To re­verse course, Congress and the ad­min­is­tra­tion could an­nounce they will:

Open to leas­ing and ex­plo­ration the fed­eral lands and off­shore ar­eas they have closed.

Speed up the drilling per­mit process — which they have been slow-walk­ing since 2010.

Ap­prove en­tire the Key­stone XL pipe­line to trans­port oil from Canada.

Can that re­ally make a dif­fer­ence at the pump? Yes. The mantra of the anti-drilling crowd is that oil pro­duc­tion takes seven to 10 years, so why do it? The longer politi­cians lis­ten to that mes­sage, the longer the na­tion’s oil re­sources will re­main un­de­vel­oped.

We can in­crease pro­duc­tion this year sim­ply by stream­lin­ing the per­mit­ting process for fed­eral lands and wa­ters. The Key­stone XL pipe­line could bring Gulf Coast re­finer­ies up to 830,000 bar­rels of Cana­dian oil ev­ery day by next year if the pres­i­dent would green-light the project.

The en­ergy mar­ket can work for con­sumers as well as pro­duc­ers, but only if Washington lets it work. Oil com­pa­nies would in­crease pro­duc­tion, and con­sumers would buy the most fuel-ef­fi­cient ve­hi­cles that fit their needs and pock­et­books. If the price of gaso­line con­tin­ues to rise, it will make al­ter­na­tive tech­nolo­gies all the more eco­nom­i­cally com­pet­i­tive. But poli­cies that re­strict oil ex­plo­ration, re­fin­ing and pro­duc­tion should not ar­ti­fi­cially drive that price higher.

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