Gas Prices Outpaced Only by the Rhetoric

By April 25, 2006Energy

There’s probably no worse place to be than between an angry mob and the object of their ire, but with that in mind, we wade into the debate on oil prices that is now gripping the country. In fact, it has become so compelling that it has distracted the Senate’s attention from the object of their ire only a fortnight ago, immigration. Ah, the short attention span of Washington.

We took the trouble to read two very concise and clear explanations of oil price fluctuations: This one is from the Energy Information Administration (EIA), an arm of the US Department of Energy. For those of you who don’t trust government to provide the true facts, here’s a link to an article on the same topic. Some clear factors emerge that drive gas prices:

1.) Supply and demand — This is an issue we’ve written about frequently in this space. It is one of nature’s immutable laws. There are two sides to this coin: first and foremost, global demand has soared with the explosive growth in China and India, among other places. However, global supply has not kept up. Here at home, we remain the only country in the world that limits access to its own natural resources. We could tap oil reserves in ANWR and in the Outer Continental Shelf if Members of Congress were really that concerned about gas prices. But apparently they’d rather make speeches.

2.) Uncertainty – In a meeting with NAM officials last year (on an unrelated topic) Treasury Secretary Snow — a PhD economist — made the observation that “the market builds in a premium for uncertainty.” Think about that in the context of the world oil market. One of the biggest sources of oil is the unstable Middle East. Another is Venezuela, with Castro-centric leader Hugo Chavez at the controls. His recent moves have made the already-jittery markets even moreso. This uncertainty is reflected in the world price per barrel of oil. And, however bad it is here, European drivers are still paying more for gasoline than we are.

3.) Refinery capacity – If oil can’t be refined, gasoline can’t be manufactured. Supply shrinks, demand grows, price rises. According to the EIA report, there were three refineries shut down by Hurricane Katrina, and they are only now coming on line. Others deferred maintenance in order to stay operational post-hurricane, but they are now closing in order to perform the necessary maintenance. Most important, we also have not built a refinery in this country in 28 years. Incidentally, the refinery bill that passed the House last year — to increase the number of refineries — garnered not a single Democrat vote.

For all the theatrical political venom directed at the oil companies, the US-based companies represent only 13% of the world’s output, a mere drop in the bucket. The real powerhouses are the state-owned operations in Russia, China, Venezuela, etc. All the finger pointing, all the speeches about price-gouging and windfall profits won’t change that simple fact. And it won’t alter the law of supply and demand.

At the end of the day, there are only so many solutions: drive down global demand or drive up domestic supply. If we could only harness the hot air being generated by the politicians and the media these days, we might solve the problem once and for good. In the meantime, we must conserve (manufacturers are leading the way in doing it and in inventing the newest technology) and we must search for new sources of fuel. Manufacturers there, too, are the ones who will invent and perfect it. But we also must continue to tap domestic supplies of oil, both on shore and off.

If you agree, drop your representative a note, tell them to stop making speeches, stop pointing fingers and start fixing the problem.

Join the discussion 29 Comments

  • gas prices says:

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  • Joel Mackey says:

    Yea, but the government is here to hep yewwwwww.

    Hep yewww unburden your lower lumbar region with excess cash. Hep yewwww find cathartic release in the sob stories they orate from thier marble facades.

    I would pay money, I would pay big money to see Chuckie Schumer do one days worth of actual work with Bush on his ranch in Crawford in June, July, or August. One day operating a chainsaw on Mesquite trees while Bush handled the axe or sling blade, what a documentary. You could have Paris and Nicole serving them lemonade on the breaks….

  • Janie says:

    The oil companies only make 8.5 cents but the government takes in about 46 cents per gallon in taxes!

  • flashdancer says:

    Pat–I saw the ad too…if the 8.5 cents on the dollar is right, that’s in line with (if not less) than other industries…

  • norman john says:

    Hello everybody..

    thanks for this blog and all the commenters.. good to get things/feelings from the face..

    just to let you know you’ll be on blogtrack soon..

    best wishes..

  • Rachel says:

    I agree with the comment made above by Angela. Right now gas prices are high because of supply and demand– massive demand and not enough supply. The only way to fix the low supply, in my opinion, is to reduce regulations on oil companies and to allow access to domestic sources of oil.

  • Pat Cleary says:


    There’s a full page ad in the WaPo today from API (, saying 55% of the cost of a gallon of gas goes to the price of crude oil, 26% to refining, distribution and service stations and 19% to taxes. It says the industry made 8.5 cents on every dollar of sales, making your point that taxes would be more than twice this much.

    Thanks for writing,

    Pat Cleary

  • MarkD says:

    Arthur Ramos Jr is exactly right. NY State used to levy taxes per gallon of gasoline. Then when prices went up before, to a bit over $2/gallon, they decided to make the tax a percentage of the selling price again.

    What I’d like to see is a breakdown of the costs of a gallon of gasoline. What percent is oil company profit margin versus state, local, and federal taxes?

    The politicians, as usual, have created this problem for us.

  • M. Simon says:

    Pocket Rocket,

    Not much point in finding new oil if it can’t be refined.

  • TM Lutas says:

    One elephant in the room is that the PRC heavily subsidizes retail gas prices. The world’s #4 economy (#2 if you believe in purchase price parity adjustments) is selling gas at retail for $1.50 a gallon today.

    Anything that is energy intensive (mostly manufacturing) is going to run to a market that gives them a 40% leg up on their energy costs. Massive government subsidy of gasoline in the PRC is a secret weapon in their fight to suck in all manufacturing and employ the country at something better than subsistence farming.

  • Andrea says:

    Let’s not make this more complicated than it needs to be.

    The causes of the problem are fairly simple: supply/demand, international instability, international financial speculation, government taxes and regulations.

    The resulting solutions are therefore simple as well: raise supply to meet demand, work to reduce dependence on foreign sources, reduce government taxation and regulation which will all lead to decreased financial speculation.

    Easier said than done, I know, but that’s what it’s about.

  • Pocket Rocket says:

    Not much point in building new refineries if we can’t find the oil to supply one with feedstock:

  • As I have stated on my blog, Chuck Schumer wants to investigate Price gouging when it fact we should be investigating TAX gouging. If gas is $3.00 per gallon, then a tank full costs $48.00 for a 16 gallon tank. Of that $48.00, $1.92 is going to the oil companies to pay for the oil shipping, refining, and gas shipping. The Federal, State and Local governments gets a whopping $10.34. That’s OVER FIVE TIMES the profits received by the oil companies!!!

    Wait just a minute! Can we also have an investigation into the high price of clothing? Jeans made in foreign countries costs at most a couple of dollars per piece. Yet, we are charged $50, $100, $150 or more for these items. Now THAT’S Gouging!!!

    Let’s not talk about Sneakers!

  • Joel Mackey says:

    Dave, You are 100% wrong. This spike in price has exactly to do with gasoline supply shortages, these shortages are partially due to decreased refining capacity since Katrina and partially due to the summer fuel mixes that the epa requires to “reduce” smog.

    Here is the energy dept. supply listing from Schaeffer’s market recap on Wed April 19, 2006

    “The Energy Department released its weekly oil inventory report this morning. Crude stockpiles fell 806,000 barrels to 345.2 million barrels, which is still 6.6 percent higher than the year-ago figure. Gasoline supplies dropped by 5.4 million barrels for the week of April 14 to total 202.5 million. In the past seven weeks, gas supplies have lost 23.4 million barrels to fall 4.6 percent below last year’s levels. Turning to distillates, inventories dropped by 2.8 million barrels to 114.6 million. Inventories are now 9.7 percent higher than last year. The consensus was expecting a fall of 1.4 million barrels.” is a link to that report’s podcast.

    Summer gas prices rise due to the required addition of ethanol more than any other single reason. More over, we put a tariff on Brazilian ethanol and sugar so that we raise the cost of producing it here.

    If they want to put windfall profit taxes on some companies perhaps they should look at Big Agriculture and Big Ethanol.

    BTW, I know autocad, was going to go into the oil industry here in texas, but 1988 wasnt a great year for the industry… so now I draw retail display designs in solidworks and weld car suspension parts part time… If anyone knows of a job that pays over 60K I might be interested.

  • cooper says:

    Nobody wants oil to be that expensive, but I see your point–it’s a shame it takes a circumstance this extreme to finally spur Congress into action. Hopefully they can begin crafting a responsible energy policy that will see investment in new technologies and initiate serious, long-term research into alternative sources of energy.

  • WorkTooMuch says:

    Tudalu, you’re right. High prices will foster innovation in energy technology. The problem is that we should have already. Our government has dropped the ball on this. I would rather them admit their mistakes and move forward instead of spewing so much rhetoric. Wait…it is midterm election year…that explains a lot.

  • Tudalu says:

    On the bright side, this is actually accelerating innovation in energy technology.

    Maybe $70 oil is good for America after all..

  • Josh Coray says:

    I will second Ed McIntosh, right now at my workplace we are running very low on Engineers, Designers, and even Draftsmen. I tell people, if they know AutoCAD, they have a job. Right now. I even get a bonus. Do you know AutoCAD?

    And I have been out on the platforms myself, doing the 12on/12off. My brother is on the North Slope right now.

    A shut down, for a single mis-wired line, can cost a plant $1 million in start up fees.

    And EVERY plant in the area is going through major upgrades, de-bottlenecking and control upgrades, to process more, better, and faster. That covers all sorts of upgrades to cleaner systems, better Sulfur recovery, better Alky units (nasty stuff HF), better Cat Cracker units, better waste water units. Several plants are getting whole new control rooms, with new controls through out the entire plant. All of this is happening right now. So while our refining upgrade process is continuous, with the increase in the profits, a lot of companies are re-investing in the refineries a lot faster, and on a larger scale than if oil was at $10 a barrel.

  • John Lehman says:

    I hate to be picky, but I will be anyway. Strictly speaking, there is no law of demand. It is possible for demand for a product to fall as the price falls. Goods that behave this way are called Giffen Goods. They are goods for which the wealth effect of a drop gives rise to substitution out of the Giffen good and into a superior substitute. Note that these are not things like Gucci purses, which are not generally supposed to be inferior goods. I’ve never actually heard of anyone finding a Giffen good, but they could exist according to the theories of consumer choice, and so the Law of Demand is not a law.

  • Bob says:

    From the AP: “Calif. Assembly Committee OKs Oil Tax Bill.”

    Democrat Assemblyman Johan Klehs:

    “The only thing I can think of why prices are going up is pure and simple greed. The way oil companies can avoid paying this tax is reducing the price of gas at the pump.”


  • markm says:

    thackney – I don’t think the author was saying the our ability to refine petroleum products hasn’t increased at all in 28 years. But it seems logical that our ever increasing need for petroleum products would require a significant investments in our refining capacity. It’s not hard to imagine that the rate of expansion of decades-old refineries has fallen behind our energy needs. We in California know this dilemna of environmental concerns vs. energy production capacity better than most with our electricity crisis a few years ago.

  • John says:

    There may not be a supply shortage in actuallity. But there is at least a perceived shortage. It is what everyone is telling you. Is it not?

  • rbecklin says:

    U.S. crude refining capacity has remained relatively stable over the last 20 years at roughly 16 million barrels per day, after peaking in the early 1980s, according to the Energy Information Administration (EIA; see link below). The EIA provides official U.S. energy statistics, and should be considered a reliable source. The critical metric we should be concerned with is refining capacity, not the mere number of refineries. So, it looks like we should expand refining capacity, however that is achieved.

  • Mike says:

    I suggest that you are the one who is being misleading. Total US operable refining capacity has only increased by about 10 – 11% since 1986.

    See this table:

    Mr. Cleary’s assertion still stands as valid.

  • Dave says:

    yeah, but enviros hamper refinery expansions too.

    And even so, it’s the high demand for barrels of oil, not the supply of gasoline, that makes gas prices higher. There are only scattered reports of small shortages due to supply line problems, but overall the gas price is not due to gas shortages but to oil prices.

  • EllisWyatt says:

    True, we have been expanding the capacity, but that is not a good alternative to building new refineries. Expanding existing refineries keeps most of them concentrated in one geographic region. When a natural disaster or other incident hits that region, we’re in trouble, as we saw in the aftermath of Katrina. It also increases the cost of getting the crude oil to the refineries since all the tanker ships have to make the journey to the Gulf of Mexico. Besides, you can only increase the capacity of an existing refinery to a certain point.

  • Ed McIntosh says:

    Here are some other facts from someone who knows. As of April 25, 2006, 22 percent of the natural gas production in the Gulf of Mexico is still “shut in” because of the two hurricanes. More than 18 percent of the crude oil production is shut in. This means neither commodity is reaching the marketplace. The MMS reports that 66 drilling rigs and/or production platforms in the Gulf totally disappeared. More than 200 suffered major structural damage. But support companies in the energy industry are literally working around the clock to restore production and fix the platforms.

    Which comes to Point 2. I work for an oil and gas engineering company that specializes in projects for smaller independents. We can barely manage the workload. We’re trying to hire more engineers, but that labor pool is small. There just aren’t enough qualified people for all the work that’s currently out there. So even if the industry wanted to suddenly increase domestic production, the people to do it don’t exist, the equipment suppliers have huge backlogs of orders so lead times are now a year or more for the high-dollar materials, raw materials like steel and alloys are once again on allocation due to high demand and there is a major shortage of welders, CDL truck drivers and people with general oil and gas experience.

    And for those who think the robber barron oil companies are conspiring to bring all this misery to the American people, I challenge each of you to go spend two weeks on an offshore drilling and production platform, working 12-on /12-off, covered in drilling fluids, grease and dirt, constantly ducking swinging pipe and steel, away from your family and friends and being dead tired when the shift ends. There would be a lot less complaining about the value of a gallon of gasoline.

  • Steve says:

    Only one correction – there is no law of supply & demand. There is the law of supply and the law of demand. The law of supply is harder to grasp than the law of demand.

    thackney – is that all you’ve got?

  • thackney says:

    Most important, we also have not built a refinery in this country in 28 years.

    But we have been expanding the ones we have for decades. Please don’t be so misleading.