OILY POLITICS

PAIN AT THE PUMP

One of the most burning questions of today is why are gas prices so high, and further what can be done about them? Frustration over this effect even seems to be affecting the Presidential Approval polls (see below). So what can be done?

So first, what causes the price of fuel to be so high lately? A Federal Trade Commission study on fuel costs and demand has some useful information on how gas prices work and why. They start with an example of an event in Phoenix, Arizona:

In August 2003, the FTC staff observed anomalous retail gasoline prices in Phoenix, Arizona. At the beginning of August 2003, the average price of gasoline in Phoenix was $1.52 per gallon. By the third week of August, however, it had peaked at $2.11 per gallon. Over the next few weeks, the price dropped, falling to $1.80 per gallon by the end of September. The price spike was caused by a pipeline rupture on July 30, and the failure of temporary repairs, which had reduced the volume of gasoline supplies to Phoenix by 30% from August 8 through August 23. Arizona has no refineries. It obtains gasoline primarily through two pipelines, one traveling from west Texas and the other from the West Coast. The rupture closed the portion of the Texas line between Tucson and Phoenix.

To obtain additional supply, Phoenix gas stations had to pay higher prices to West Coast refineries than West Coast gas stations were paying. West Coast refineries responded by selling more of their supplies to the Phoenix market. Phoenix consumers did not respond to significantly increased gasoline prices with substantial reductions in the amount of gasoline they purchased. In theory, to prevent a gasoline price hike, Phoenix consumers could have reduced their gasoline purchases by 30%.

REFINERIES AND YOU
We see two effects here. First, while an accident such as a gas line rupture will affect prices, the fact that there have been no new Oil Refineries built in the United States since 1976 is causing the price of gasoline to raise more than a shortage normally would. While the US population has risen from just over 200 million to almost 300 million, the ability to supply fuel to these numbers has not increased to match this demand. According to reports, gasoline use has increased by 25% or more since the last oil refinery was built. Further, the number of domestic refineries is declining. In 1980, there were more than 300 U.S. refineries. At the end of 2003, there were 149, roughly a 50 percent decrease. The Reason Foundation reports that:

The nation's 149 existing refineries have been running at maximum capacity trying to meet record demand and, as a result, not only do we import oil, we actually have to import 10 percent of our daily gasoline from refineries overseas.

Consider the example of Arizona Clean Fuels, which has been trying to build a small refinery outside Yuma for almost 10 years. It took five years just to get air-quality permits. Now they hope to be operational in 2010, 15 years after they started the project.

The biggest problem faced in the need for new refineries is the BANANA attitude: "Build Absolutely Nothing Anywhere Near Anything" that has replaced the Not In My Back Yard effecet. Instead of not wanting the loud, ugly, stinky thing built nearby my house, the movement is to not have them built anywhere. The article by Anne Applebaum is about windmill power plants, but it can be applied to nuclear or any new major construction. Today I doubt the federal highway system would be politically feasible.

But there's more reason than that. Ann Parker notes that

Experts also say fewer refineries give the oil companies a huge advantage: They stand to make a lot more money when supplies are limited, so, even if people wanted more refineries, companies don't have a lot of incentive to build more. In the first quarter, industry giant Exxon/Mobil saw its profits from refining operations jump 38.8 percent. Refining profits at Conoco/Phillips grew 19.2 percent in the first quarter.

Oil companies have little reason to address the shortage because not only do regulations and running costs make refineries of limited profit (see this article by CorpWatch for more information), but the shortage actually is making the profits for these companies significantly larger. Which brings us to point two.

YOU AND REFINERIES
Second, consumers have the power to affect gas prices but choose not to by and large. While we can complain at the government to do something to fix our woes, the primary problem is that we need to take charge of our own problems and do what we can at least while we ask for government to do it's part. The FTC report goes on:

At some point, gasoline prices can become high enough that consumers will make
substantial reductions in their gasoline purchases. How much prices need to increase depends on how easily consumers can adopt substitutes for gasoline – such as taking public transportation. Empirical studies indicate that consumers do not easily find substitutes for gasoline, and that prices must increase significantly to cause even a relatively small decrease in the quantity of gasoline consumers want. In the short run, a gasoline price increase of 10 percent would reduce consumer demand by just 2 percent, according to these studies. This suggests that gasoline prices in Phoenix would have had to increase by a large amount to reduce the quantity of consumers’ purchases by 30 percent, the amount of lost supply.

In short, if Arizona drivers had reduced their purchase and use of gasoline, then the prices would not have risen by as much. Modern car purchases tend toward heavier, less fuel efficient models such as SUVs, which while safer and a roomier ride for larger Americans and their families, also requires a greater amount of fuel to reach a given destination. Concerns for safety in smaller, more fuel efficient cars are valid, but to complain about the price of fuel while not taking logical personal steps to avoid those costs is irrational.
In the United States, we live in a nation that is over 3000 miles across, and a trip of 50 miles or more to work and home is not unusual in some cities, such as Los Angeles. Shipping goods across the states can be a matter of days rather than hours in smaller countries, so there is a limited amount that much gasoline use can be reduced by. Mass transit and carpooling makes some of this easier, and is used by large numbers, but again there is a limit at which people can realistically reduce their fuel consumption.

To whatever extent we can, we all have a responsibility to do so. But the government also has a responsibility to do what it can, as do the companies that buy, refine, and distribute gasoline.

THE BUSINESS OF AMERICA...
In order to address the cost of gasoline, the consumer must be more wise and thrifty, thus pressuring oil companies to lower prices - or at least not raise them as much. Further, business must recognize it's responsibility to consumers and the economy at large when factoring it's profits. Capitalism is a very fine thing as an economic system, but if it is not combined with a moral populace, then it breeds the worst kind of greed, abuse, and crushing cruelty to buyers and employees. Oil Companies are legally free to make whatever profit they desire in their business endeavors, and in a capitalist economic system they are encouraged to do so. But they are morally obliged to be responsible and careful about how their profits affect the human beings involved in the exchange.

DE GUBMINT
But what can government do? As always, the first thing to remember is that government should not step beyond the boundaries the United States Constitution constrains it to. No government program or effort should be one that exceeds the power that government is limited to by their constitutions, both federal and state. The government also has a responsibility to recognize that fuel prices are a national concern because of how greatly they affect not only consumers directly but the economy at large.

When gas prices go up, that not only affects your cost when you fill your tank, but the cost of shipping the goods you buy at each store because the tanks of those ships, trucks, and trains must be filled as well. Further, because all of this is more expensive to everyone, prices raise in other areas not directly related to transported goods, and wages must raise to meet the demands of every day life - or jobs must be cut, and possibly businesses closed. This ripple effect impacts the entire national economy. And when the US economy is effected, so is the rest of the world.

The President and both chambers of Congress have their duties in this, and while there are other critical topics that need to be addressed (illegal immigration, terrorism, balanced budget, etc), here is my solution:

HAIL TO THE CHEIF
The President should go on TV tomorrow and gave a speech laid out a plan to deal with high gas prices.

1) Push to have more refineries built. President Bush recently signed a new energy bill that tries to make it easier to build new oil refineries, especially in areas with high unemployment – where the new jobs would likely be welcome. This should be announced along with a call to and pressure on states to expedite the work.

2) Pressure congress to establish a single national standard for different blends of gasoline, instead of each state establishing their own. The General Accounting Office did a study of the effects of states mandating their own gasoline blends, and found that at least 45 different kinds of gasoline were in use in 2004. Part of this cost is because of a clause in the 1990 Clean Air Act which requires areas which have over a certain level of pollution to use a given kind of blend. This blend alone costs 4-8 cents more than conventional gasoline, according to the Federal Trade Commission. Not every refinery is able to produce each kind of blend, which bottlenecks the process. Further complicating matters is the fact that oil pipelines cannot carry more than one blend at a time, and to avoid contamination must clean the line before pumping the new blend. Reducing the number of blends to a national standard rather than individual state choices would result in a reduction in all these costs.

3) Announce an investigation into price-fixing across the nation for gasoline, an effect most people see every day gas is raised in price almost uniformly across an entire city at the same time. While retailers are free to raise and lower prices as they see fit, and many or all may do so at the same time by roughly the same amount, this happens every time gas prices change, at the same hour, and while this may not be due to mutual agreement, an investigation would be useful to examine this effect. Guy Cramer has written an article examining the way gas prices change over the US and Canada, including an analysis of how gas prices fluctuate over each week.

4) Announce an investigation into the forces that cause gas to raise the hour some disaster or war that clearly will not impact gas prices for months. While this is said to be caused by the system of speculation and purchasing now in place, an investigation into ways to ease the size of reaction and how much disasters actually affect gas prices would be useful. Events like Hurricane Katrina or the Exxon Valdez wreck immediately affect the price at the pump, while their real effects on gas supplies and costs - if any - are not felt for weeks or months. Part of this is due to market forces, but an investigation into whether it all is caused by this and action by congress could be useful and informative.

5) Call for oil exploration and drilling in ANWR immediately. The Senate has passed funding for drilling in the Arctic National Wildlife Refuge, but it is up to the House to pass their version and then the budget worked out between both chambers. When this was attempted last time, 2005, The legislation died in a conference committee of House and Senate negotiators trying to iron out the differences between the two bills. This time it should be pressed through and the president can lean on congress both publicly and privately to work this out.

6) Call for a reduction in the Federal Gas tax, along with an appeal to governors to reduce gas prices. Gasoline taxes per gallon account for over 18 cents at the federal level, plus additional taxes if the area is too polluted (again due to the Clean Air Act) plus as much as 35 cents at the state level (in Hawaii. The national average is 23.6 cents per gallon). If consumers don't like high gas prices, here's an easy place to reduce them that the government can undertake immediately. Since everyone agrees that government spends too much money in any case (although there's some argument in which areas), it can do without as much money.

7) Call for an examination of all present oil industry regulations to determine if they are accomplishing what they are intended to do and if they are causing more harm economically and to the consumer than they are intended to benefit them. Some regulations are beneficial and required because with humans although we call for morality, often people are not, and in modern society the traditional structures and pressures for moral behavior have been eased or often eliminated.

8) Announce that CEOs and executives of gas companies will be called into President Bush's office for a talk about responsibility to consumers and the nation's economy. This is likely to accomplish little, but at the very least they should be chastised for the absurdly gigantic "retirement packages" such as Exxon CEO and Chairman Lee Raymond who retired to the tune of $69.7 million in compensation and a $98 million pension. Having congress and the president pressure these men might make them more cautious and thoughtful about their spending and bonus packages. While I recognize that the CEO is a tough job that requires significant skill and personal ability, there is a human limit to how much this is actually worth. When people are upset about gas prices already, this kind of egregious misuse of profits does not help anyone's mood.

9) Announce that he is instructing the state department to pressure OPEC to lower prices. OPEC is waging a subtle war against the US in anger against our presence in the middle east. Remember that members of OPEC include sworn enemies of the US such as Iran, Lybia, and Venezuela, and they use what influence they have to raise prices and hurt America and thus the rest of the world.

This is a simple set of goals the president could set out clearly and repeatedly to the American people and congress, tangible and easy to grasp plans to push toward and inform the public with. Several of them appear to be impossible to achieve such as lowering taxes.

An interesting study that is moving around the blogosphere now is a comparison between President Bush's approval numbers and the price of gasoline. This chart shows a remarkable concurrence between the President's approval ratings and the average price of gas (note: up is lower cost in this chart to more clearly show the effect).


Now, without more data and a more careful study, it is not possible to know if this is coincidence (occurred at the same time) or causality (one happened because of the other) but it would not surprise me if the general public became more surly and unhappy with the president when their pocketbook is most impacted. Remember the cost of gasoline is not merely felt at the pump, but at the store from goods that had to be driven around and at home where heating costs can be driven by heating fuel costs. While it is irrational to condemn President Bush for how much it costs you to fill your car (and coincidentally negates the "blood for oil" cry by some in the past), consumers tend to judge the President by how their wallet feels rather than by more rational criteria if past elections are any indication.

The steps outlined above for the President to take would likely give him a big boost in approval rating, but it also would be a solid and real plan for dealing with gas prices that does not involve unconstitutional regulation or control over private business and offers real benefit to consumers.

In the final analysis, however, we all have a part to play in this, and the first steps for each of us is easy: drive less, drive cheaper, and use a more fuel efficient car or public transportation when you can.

*UPDATE significantly expanded and annotated the original post.
**UPDATE Economic Liberty, a well-educated and eloquent Libertarian suggested that points 4, 7, and 8 are at least the first steps toward greater socialism and government control of business that he believes should be left as free as possible:

I am for laws that enforce contract, protect property and punish fraud, as I have said. However, it isn't corruption to charge a high price. Government has no right to decide what is a high price. People decide that. That is the basis for a free market, not a controlled market.

He went on to express his concern that any sort of investigation into price gouging or price fixing would result in price controls, which worked so very well for President Carter in the late 1970's, resulting in the joy of gas lines:

1. Do you understand how in order to go after "price gougers," you will need to find the "reasonable" price?

2. Do you recognize that once you have found the "reasonable" price, everyone charging more would be gouging, and hence that "reasonable" price is now your price cap?

3. Do you recognize that most economists and history agree that price caps are bad and cause shortages - lines - and discourage new investments, creating long term cost and supply problems?

4. Do you recognize that the problem with price caps in e.g. the oil industry is exactly the same problem that occurs with the minimum wage (a price floor) and with public industries such as universal health care (where prices are also fixed by government) and in general anywhere that government strong-arms the market?

5. Do you also think that government should set wages, costs for healthcare and provide the poor with housing, vehicles, food, clothing and all of the other important things that all people need and which greedy businessmen might over-charge for?

Now while I share his concern about government controls over prices - which have proven to be a miserable failure over and over - and I agree that it is generally a Bad Thing for government to be too greatly involved in private enterprise and business, I am not quite as libertarian as EL.

I agree that most business should be left unmolested, market forces will deal with prices in most cases. Non critical business such as burger stands, shoe stores, limousine drivers, yacht builders, and so forth are fine without much government attention at all, outside of taxation. But businesses critical to the economy of the nation and the people that live there fall into a different sort of category to me.

I also agree that if you set a price that is "acceptible" to the government, this is little more than price controls - and as I've mentioned, this is bad, even for Big Oil©. But that's not what I think needs to happen to prevent price gouging. If a critical business, which by all definitions oil is in the United States (and the rest of the civilized world at present) charges so much that it is destructive to the economy and people at an eggregious level, the government has a responsibility to step in.

Government has a very limited role - I tend to be very Lockeian in this - and that role is to protect its citizens, punish the wicked, and promote good. Part of protecting the citizenry (or subjects, if you are in a monarchy), requires the government to protect from greed, graft, corruption, and excessive profitmongering. I'm not talking about 3 dollars a gallon for gas, I mean like 15 dollars a gallon because they know they have everyone over an oil barrel.

Another poster on Right Wing News where we discussed this, MrMeaner mentioned somethign that happened in his home state:

Now, it is true that some local establishments are quick to take advantage of a bad situation,but a state AG should exercise his athority to take action against a business that would operate that way.( I can think of a local example,during a 2 week power outage after an ice storm. Our state AG prosecuted the hell out of a couple of dealers operating on generators who tripled the price per gallon).

I would propose that instead of EL's "acceptible" level, there is instead a high "unacceptible" cost that a critical service or commodity can be priced at, far above what a rational businessman is likely to raise it to - but somewhere a truly unethical gouger might, as in MrMeaner's example. The idea is not to set price controls, but to set a legal limit at which a business has crossed the line between private enterprise and effective theft.

Having the gas execs come in and get a talking to by the President is primarily a PR maneuver, it would give people a better feeling that their government is aware of the problem and is doing something about it. But the most useful area that could be looked at are the way crude oil is brokered and bought. The system is much like any other commodities purchasing, with buyers speculating on the future cost of a product. Here, Economic Liberty has given a helpful quote:

"Not only may there be malfeasance, but there also might be a way to do it better that controls the wild swings in prices and absorbs the effects of emergencies and disasters."
-FDR, referring to the stock market, having just come out of the crash in 1929

Now, with President Roosevelt, this usually meant "socialism, and how!" but that does not need to be the answer. It is a foolish assumption that we're doing everything as efficiently and properly as possible, that we cannot do better and that no new ideas or systems would be superior to what we do now in oil purchasing. I'd like to see a better way that smooths out the sudden jumps in gas prices that events like Hurricane Katrina or war causes.

Again, MrMeaner provides insight better than I put it originally in #4, above:

First of all, you can get there without govt. oversite, I believe. It could be something as simple as changing the type of private operational investment into something a little more mid-term.
Maybe you could gradually ease investments toward a CD-type scenerio, and away from the daily markets.That would allow for continued private investment, but would limit the effect of the daily dose of gloom and doom, and should stop the daily swing of pump prices,while giving the investor time to reflect on whether the indicators are hyped-up or real....I guess.

This is what I was pointing at, some mechanism, some manner of making the system work better without government controlling the whole process. Because despite our disagreements, EL and I agree that the government is in general poor at doing nearly everything.

***UPDATE: An excellent analysis with useful graphs can be found here showing the price and fluctuations of crude oil over the years. Looking at this you can see the effect war, different presidents (and their policies), and other global events have had on oil prices.

Essays