Dave's Energy

Friday, May 25, 2007

high gas prices? who's to blame?

Since Memorial Day is upon us and Americans tend to drive more than usual on this 3-day weekend, there is increased clamor about the high gas prices at the pump. Many politicians have seized this opportunity to go after big oil companies with accusations of price gouging. It is easy to take this position and point fingers at ExxonMobil and their ilk for taking advantage of us; unfortunately, the truth is a bit more complicated and inevitably leads right back to us, we who drive large inefficient vehicles and show no signs of changing. Simple economics applies. If you want lower gasoline prices, then get more efficient vehicles; drive less; use public transportation; walk more; in other words, lower the demand for gas and the price should follow. Until wholesale changes in our transportation habits happen, expect gasoline prices to keep rising. $4 a gallon might look pretty cheap in hindsight. Remember when $2.50/gal was expensive?

On the bright side of all this, higher gasoline prices will likely predicate greater incentive to fund alternative fuels which, as of yet, are still too expensive to fully adopt.


Wall Street Journal
May 25, 2007

Pains at the Pump
Page A14

It's Memorial Day weekend and the start of the summer driving season, so naturally it's time for Congress to grandstand against $3-a-gallon gasoline. And right on cue, the House passed legislation this week to criminalize gasoline "price gouging," whatever that is. Perhaps this is all designed to distract the public from Congress's own role in raising gas prices.

Under the anti-gouging law, service station owners could face up to 10 years in prison if they dare to raise their prices too much when supplies are low. Representative Bart Stupak, the Michigan Democrat who sponsored this scheme, said the vote would determine whether Members "side with Big Oil" or "side with consumers who are being ripped off at the gas pump." Who elects these guys?

The inconvenient fact is that there's no evidence of price rigging by Big Oil or the tens of thousands of independent service station owners across America. The causes of higher gas prices include $65 per barrel oil caused by rising global demand and geopolitical tensions; a record high U.S. gasoline consumption of 380 million gallons a day; and refined gasoline shortages caused by Congressional rules and mandates. Far from withholding production to raise prices, U.S. gasoline production of 8.8 million barrels per day is higher than any time in history and refineries are getting more gas per barrel of oil than ever before.

This isn't the first time a spike in gas prices has prompted Congress to allege price fixing. It's not even the second, third or 10th time. Since the OPEC oil embargo some 34 years ago, Congress has requested more than 30 investigations into whether energy companies have conspired to inflate profits. In nearly every instance, the Federal Trade Commission or the Department of Energy have found no evidence of price fixing. Only last year, Congress ordered the FTC to investigate whether Big Oil had manipulated prices after Hurricane Katrina in 2005. The agency found "no instances of illegal market manipulation that led to higher prices."

What does "gouging" mean anyway? No one on Capitol Hill can answer that question. The House bill prohibits energy companies from charging a price that is "unconscionably excessive." There's a precise legal term. It further explains that it shall be a crime whenever "the seller is taking unfair advantage of unusual market conditions" or "the circumstances of an emergency to increase prices unreasonably."

Still confused? Perhaps this will help. Gouging occurs, says the bill, whenever "the amount charged represents a gross disparity between the price" sold at the pump "and the average price at which it was offered for sale by the seller during the preceding 30 days." That could cover any price spike for any reason. Or gouging may occur when "the amount charged grossly exceeds the price at which the same or similar crude oil, gasoline, or natural gas was readily obtainable by other purchasers in the same geographic area." So if your oil supplier charges more than a competitor's does and you then raise prices, you could be a felon.

In other words, we are all criminals now. No one seriously believes this law will lower prices for consumers, but you can bet that brigades of lawyers will earn fat fees sorting out what exactly is meant by "unreasonably," "gross disparity" and "excessive."

If Congress wants to locate genuine gas price villains, it should look in the mirror. Domestic refining capacity is stretched in part because environmental laws discourage the building of new refineries. Meanwhile, new mandates for ethanol and other "boutique" gasoline blends make it harder for the industry to meet refining shortfalls. The Lundberg Survey estimates that the ethanol mandate alone adds 10 cents to each gallon, and that 36 refinery snafus this year have cut U.S. gas supplies by about 8%. Refiners are also currently switching to mandated summer gasoline blends -- another contributor to the current price spike.

Congress's ethanol craze is a special problem because it further reduces the incentive to invest in new refining capacity. Gasoline refining is a low margin business in any event, and only a very brave, or very foolish, CEO would invest heavily to refine more gasoline when Congress is bent on replacing it with ethanol in the future.

If Congress wants really high prices, it should keep this up. After Hurricane Katrina, several states including Virginia strictly enforced price gouging laws, and many service stations simply ran out of gas altogether. Gas wasn't available at any price. Last year's FTC report pointedly advised Congress that "federal gasoline price gouging laws that have the effect of controlling prices likely will do consumers more harm than good." It added that, "Competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump." Such a lesson in supply and demand seems beyond Congressional understanding.

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