By: Brian Sikma
Today, our nation faces higher gas prices that leave consumers fuming over the cost of a fill-up. While some have been quick to blame the oil companies for the rising prices, a closer look at what is taking place will help us understand the situation. Taking shots at “windfall profits” makes for rousing reading, but it doesn’t give us a real picture of what is going on.
While today’s prices are high, according to the Energy Information Agency, gasoline prices in 1924, when adjusted for inflation, were $3.10 per gallon. While inflation has caused the price of goods to rise, the real price of gasoline fell until the energy crunch of the 1970s; then in 1980-1982 adjusted prices rose to $3.20 per gallon. Since that time gas prices dropped until just a few years ago.
Prices rise when demand outpaces supply. If the market demands more gasoline than oil companies can produce, prices are going to rise until the demand and supply levels balance each other out.
This simple cause and effect situation is sometimes tampered with as artificial limits are placed on one side of the equation. These artificial limits usually come in the form of government regulations. The federal government and some state governments, impose environmental regulations on both refineries and the gasoline that those plants produce. The result of this tampering is a gas price that is higher than the normal effect of the supply and demand ratio.
If any entity is making a “windfall” off of higher gas prices it is the state and federal governments. In 2005 government consumed $71 billion in taxes from gasoline sales. That figure is double what government took in taxes from the oil industry in 2003.
A new refinery has not been built inside the United States for nearly 30 years. While fuel companies have been able to expand their existing refinery capacity, heavy handed environmental regulations have prevented the construction of badly needed new plants. This inability to build new refineries strangles the ability of companies to quickly refine enough gasoline to meet an expanding market need.
While America continues to import most of its oil, massive oil reserves in Alaska and parts of the American west, as well as off shore reserves, go untapped. With an increased demand don’t you think it would be wise for companies to be able to access this domestic oil? Welcome to Potomac Logic. Regulations handed down from Washington bureaucrats continue to prevent the effective use of domestic oil supplies. While legislation passed in 2006 cracked open the door of access to some oil reserves, a Washington imposed dam still stops the flow of more domestic oil.
According to the AAA, part of the reason for the recent gas price spike comes from the inability of refineries to quickly switch over from federally mandated winter fuel blends to the federally mandated summer blends. The EPA has mandated 12 types of gasoline blends for different parts of the country. Additional state regulations bring the total number of separate fuel blends to 30. Each blend must be kept separate from each other. This means that companies are forced to maintain separate production, transportation, and storage facilities, all at a higher cost to the consumer.
After looking at the facts, we can see that we do not have to be in our current energy situation. The solution to our problem is not more government regulation or increased bureaucratic oversight. The solution is to get the federal government out of the way and let the market run itself.
We need to increase our oil supply by allowing environmentally responsible drilling to take place. By drilling for our own oil we will lessen the number of geo-political situations that have the potential to adversely affect our energy prices. We need to loosen the environmental regulations that strangle gasoline producers’ ability to build new refineries. New technology now allows cleaner oil refining to take place and we need to update our regulations to reflect this change.
Big Oil is not wholly to blame for the high gas prices, Big Government bears much of the burden. If politicians wish to enact meaningful energy policy that will reduce prices they would be wise to start breaching the regulatory dam that keeps domestic oil from flowing into the marketplace. They need to cut through the red tape that has the energy market in a strangle hold. Now is the time to look beyond self serving special interests and towards common sense solutions that will allow the market to correct itself.