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Increasing Supply Brings Prices Down
Sen. Barack Obama and Sen. Hillary Clinton both say that they can lower gas prices if they are elected president. But unless they plan on putting an additional couple of million barrels of oil onto the world market from their own personal stock, their efforts probably will not lead to much of a reduction at the pumps and could make things worse. Despite the liberal mythology that gas prices are set in a shadowy conspiracy by oil companies in some oil-filled back room, the fact is that oil is a commodity traded on the world market. American oil companies can no more set the price of a barrel of oil than they can impact heavily on the world's supply.So what can a president of the Federal government in general do to help ease gas prices? The answer in the short term is not much. The Federal government does not produce a drop of oil on its own, so nothing it may do can have an immediate impact on production. But the government can institute policies that negatively impact supply, leading to higher gas prices. Increasing taxes on oil companies and restricting exploration and drilling are two of those policies. There are only two guaranteed ways to reduce the long-term price of a commodity, lower demand or increase supply. Conservatives believe that the government should for the most part resist the temptation to try and regulate lower prices and allow the oil companies to do what they do best, produce oil for the market.
Government intervention in the market inevitably leads to restrictions in supply. The United States could end its dependence on foreign oil in less than 10 years if the government would allow American oil companies to drill in areas where there are known reserves right here in the United States. The United States Geological Survey recently announced that it had increased its estimate of recoverable oil in the Bakken formation of western North Dakota by 25 times to between 3 and 4.3 billion barrels. That is enough oil to satisfy 5 months of demand in this country if it served as the only source of oil. And there are other domestic sources of oil that would add to the total. But the Federal government prevents oil companies from exploring and developing resources in large area of the country. The most famous of these is the Alaska National Wildlife Refuge, which has been the subject of much Congressional debate in recent years. The government should reduce restrictions on drilling, on and off shore, and allow oil companies to increase world supply from domestic sources. Just the announcement that the United States was going to fully develop its known oil reserves would help bring down the price of a barrel of oil in the near term.
Another way that the government puts pressure on supply is by mandating so-called "boutique" blends of gasoline for use in different parts of the country. The Environmental Protection Agency currently requires the use of more than 15 different types of these reformulated low-emissions fuels to help reduce air pollution levels. Each of these is more expensive to produce and must be shipped separately, which in turn increases the price of gas at the pump. Furthermore, some have not resulted in the expected reductions in pollution that they were designed to achieve. Cleaner air is a worthwhile goal, however, and reformulated gas has a role to play. The government should reduce the number of blends in use, perhaps down to one, to help open up bottlenecks in supply caused by refineries shifting gears to produce all the different types of gasoline.
Liberal and populist politicians get a lot of mileage out of promising to reign in oil company profits. But what they will not admit is that the Federal government, and governments at the state and local levels, profit far more from a gallon of gas than the oil companies do. The Federal gasoline tax is currently 18.4 cents per gallon. That's more than twice the average per-gallon profit of eight cents that the oil companies make. It is true that, taken as a whole, oil companies are making astronomical profits, billions of dollars per quarter. But even all of those huge profits are dwarfed by the total amount of money that Federal and state government gas taxes have grossed. Since 1977, governments have collected $1.34 trillion in taxes on gasoline; more than double what all the U.S oil companies combined made in profits over the same period.
Perhaps the only thing government can do to impact the price of gas immediately is to suspend the gasoline tax. But while an 18 cent drop in gas prices would be welcome, it would only be a temporary solution. In the long run, government should practice less intervention in the market as a means of keeping gasoline supplies high enough to meet demand. The fact of the matter is that demand for oil is increasing worldwide, and has not yet peaked here in the United States. Until people start to significantly change their driving habits, or viable alternative sources of energy are brought to market, supplies of oil will have to increase for prices to come down.
Recent Comments
(Page 1 of 2)Mark Impomeni3:43PMApr 29th 2008
Pete,
Thanks. I didn't focus on reducing demand because I figured the other post would talk a lot about conservation and alternative fuels. I don't think you'll be surprised to learn that I believe there isn't much government can, or more to the point should, do about demand, either.
The demand side solutions offered by liberals and Democrats--more efficient cars and alternative sources to name two--don't really reduce demand, they restrict use. Government should not be in the business of telling Ameircans what kind of car they can drive or how they should fuel it. Those are questions that should be answered by the market.
Consumers will decide when prices have gotten too high by their actions. They will lower demand on their own by turning to smaller cars, driving less, or using public transportation. When governments try to engineer these outcomes, they only make more trouble.
Take biofuels for example. They are highly subsidized by the government in the name of reducing our dependence on foreign oil. What has resulted is not a dramatic increse in the use of biofuels, but a sharp rise in corn prices worldwide as demand for corn to produce ethanol, and collect the subsidy, grows. An unintended consequences to be sure, but one that can only result from government intervention.
Thanks for reading and commenting.
Sincerely,
Mark Impomeni
S. Willis4:18PMApr 29th 2008
I like to look at it this way when it comes to opening up more drilling in North America.
1. There is absolutly no guarantee the oil co. that drill out the oil in North America will sell it here opting instead to sell to Asia as is currently much of the oil already pumped out of the ground in the U.S.
2. The oil co. may decide (as they have on creating new refineries) it is not financially beneficial to them yet to pump out oil in the U.S. That it is financially more beneficial for them to wait until price of oil is in a stable and permenent increased price.
3. If the Oil co. chose to drill for the oil in the U.S. the price of fuel will still be at the whim of commodities brokers. They currently have taken what is really a $60 barrel of oil and artificially inflated it to well over $100. So more drilling will have little affect on price of oil also.
The only true insurance against gas and oil prices is to find a new, stable and alternative source of energy. There really is no way around it. Not to mention there may be enough in the ground to sustain our current usage for 150 years, but considering we up our use every year as do many other countries that WILL need oil too that oil probably won't last that long.
rosa Ivey5:10PMApr 29th 2008
everybody don't buy gas fri the 2nd
jbj5:14PMApr 29th 2008
7-11 SHUT THEM DOWN.
TURN OFF THE IGNITION AND SIT FOR 15 MINUTES, 30 MINUTES DAY 2, 45 DAY 3.
WHEN GAS HITS $2.00 WORK RESUMES
Michelle5:35PMApr 29th 2008
This problem is in our control and that of the Government!!!!! Yes we can conserve but what about those who already do. Those who only leave the house to commute to and from work because that is all they can afford to do. Those who walk everywhere else because gas to and from the store costs to much, not to mention the rise in food prices to feed your family because of the ridiculously high gas prices!!!!
I say this because this is something we couls have ended long ago!! For years we have had the technology and ability to successfully make and run vehicles for a little under 3,000 miles to the gallon. That is right, look it up. For one gallon of gas we COULD commute for almost 3,000 miles!!!!!!!!!! With todays prices that would be nothing. $4.00 to make it to an from work, the grocery store, visit family I haven't seen. No Problem!!!!
The Government refuses to mandate that Automobile companies take the appropriate steps to evolve into tadays newer and more beneficial to not only THE PEOPLE but THE ECONOMY and ENVIRONMENT technology that is THERE!! IT IS THERE!!!
We contribute to this by going out and buying cars that have Wonderful higher MPG of 35 WOW!!!!! Educate yourselves and others and together we can stop this gouging!!! There is always a solution, with education and dedication it can be done. Think about the 2,965 (roughly) miles PER GALLON that you are giving up!!!!
Matt6:03PMApr 29th 2008
Michelle5:35PMApr 29th 2008
This problem is in our control and that of the Government!!!!! Yes we can conserve but what about those who already do. Those who only leave the house to commute to and from work because that is all they can afford to do. Those who walk everywhere else because gas to and from the store costs to much, not to mention the rise in food prices to feed your family because of the ridiculously high gas prices!!!!
I say this because this is something we couls have ended long ago!! For years we have had the technology and ability to successfully make and run vehicles for a little under 3,000 miles to the gallon. That is right, look it up. For one gallon of gas we COULD commute for almost 3,000 miles!!!!!!!!!! With todays prices that would be nothing. $4.00 to make it to an from work, the grocery store, visit family I haven't seen. No Problem!!!!
The Government refuses to mandate that Automobile companies take the appropriate steps to evolve into tadays newer and more beneficial to not only THE PEOPLE but THE ECONOMY and ENVIRONMENT technology that is THERE!! IT IS THERE!!!
We contribute to this by going out and buying cars that have Wonderful higher MPG of 35 WOW!!!!! Educate yourselves and others and together we can stop this gouging!!! There is always a solution, with education and dedication it can be done. Think about the 2,965 (roughly) miles PER GALLON that you are giving up!!!!Michelle-
================================================
Michelle-
I think you have been reading a little too much into conspiracies. Think about it, if auto makers had the technology to make a car that ran 3,000 miles on 1 gallon of gas, why hide that fact. Wouldn't they sell more cars than anyone else, taking the automotive market by the gonads. Your thought is not logical on this matter in any way, shape, or form.
rebecca6:37PMApr 29th 2008
I think both articles have some valid points. Neither one mentioned that Bush is an "oil man". The speed limit should have been dropped months ago. People are so focused on actual gas for vehicles that we aren't even thinking about the price of home heating fuel. Many families are going to be helpless come this winter when oil is over $3.oo a gal...then what? We as Americans have to make a stand, toghether, at one time. Imagine if ( I know it's far fetched) we all stayed home for 24 hours? The impact would be HUGE.......I bet it would get someone's attention.
Mark Impomeni6:41PMApr 29th 2008
S. Willis,
All true. However, it doesn't really matter where American oil gets sold. The key here is world supply. Just as when governments print too much currency, the value of all their existing currency goes down, so too will the price of oil go down worldwide if a large enough source of new supply floods onto the market.
You may be right about an alternative source. But I would argue that diversification of sources would be better. We need energy from a variety of sources. But the fact is that our economy runs on oil now and will continue to do so for the foreseeable future. In light of that, the only way to reduce gas prices in the short term is to increase oil supply.
Thanks for reading and commenting.
Sincerely,
Mark Impomeni
richard6:57PMApr 29th 2008
WHY DONT THE TRUCKS SHUT DOWN???THERE USED TO BE TEAMWORK AND THINGS GOT DONE WE NEED TEAMWORK.........WE AINT PANSIES
MICKYMUSE6:59PMApr 29th 2008
WHAT IS HAPENING TO AMERICA, PLAY HEAD GAMES WITH OUR PEOPLE!! WHATS THIS DRILL FOR NEW OIL..............WHAT WE HAVE CAPED BY PRES. CARTER30 YEARS AGO, COULD BE RELEASED, BEFOR THEY DRAW IT UP FROM THE OTHER SIADE OF THE WORLD!WHO KNOWS????
STOP SHIPEMENTS OF RICE, WEAT, CORN AND SUGAR AND LET THEM DRINK THEIR OIL AND SORRY HILLARY AND BORAX
Steve7:02PMApr 29th 2008
Iraq needs to start paying the US in oil for the war. This will accomplish two big issues. One the oil supply for the US will increase bringing down the cost of gas. Two, the US will stop pouring billions of dollars in to the world market therefore strengthening the dollar.
MICKYMUSE7:16PMApr 29th 2008
AND DONT GIVE ME THAT , WELL THEY WILL GET IT FROM ANOTHER COUNTRY!!! THEY ARE GETTING EVERYTHING ELSE FROM OUR FORMER EMPLOYED LOST WAGES!! LET THEM GET THEIR RICE,CORN,WEAT AND SOY BEAN TOO, TILL THEN DRINK THE CRUDE!!
Cozi7:53PMApr 29th 2008
Good gosh!!! I've finnaly read in print what I've been saying since we went to IRAQ!!! Let them freeze the price of a barrel at $50 to pay for their war!!! Way to go Steve!!!
Tom Slaughter7:59PMApr 29th 2008
I'm not buying into the theory that big oil companies aren't controlling prices by and large. They're remaining unified in their attempts to fix pricing - and they're profiting as a result.
If the American public could unify the way these oil companies do..... we'd have noooooo problems.
Its been circulated around the internet about 1,000 times, and I still believe that our course is in OUR hands. Hell - boycott ONE specific company for 6 months and they'll get the message!!!! These ideas about boycotting all companies for one day aren't anything but a pin-prick. Put one oil magnate out of business, and they'll all be wondering who's next!!!
fourdeezz8:18PMApr 29th 2008
You hit the nail on the head Tom Slaughter!!!!!!!
THaidmom8:19PMApr 29th 2008
Ok I didn't even have to read the whole thing before agreeing with you. Why should we subsidize their terriorist attacks on us when we can use our own oil. I don't even think we would have to drill very far before we would see them increase supply of oil cause what else do they have to sell us? Let us drill in our own country!
mark smell8:23PMApr 29th 2008
What a hack these writers are, paid propagandists.
They blah blah blah and yadda yadda yadda, free market but they don't mention the subsidies the oil companies are getting!
These aol writers are paid by aol/time warner so that should tell you who they speak for.
fourdeezz8:28PMApr 29th 2008
We just need to stop buying from the top two suppliers long enough to create a gas pricing war between the oil companies, they raise the prices we do it again. We can control the prices!!!
Phil10:32PMApr 29th 2008
The oil companies are raping us.
We need to not drill here in the States, we need to save our oil for when the rest of the world runs out, then we will really be a "superpower."
Not everybody can afford to go and buy a new car that gets better MPG, some of us are stuck with our SUV, it's paid for so why get into a car payment?
We need to stop paying for a war that we dont need to be in, they dont want us there so we need to come home.
The cost of living keeps going up but our wages stay the same, higher health care, higher gas prices, home heating, electricity, food.
Something has got to give, I have to use vacation days because I cannot afford gas to get back and forth to work this week.
They ship jobs overseas becasue it is cheaper for labor and taxes, can you blame them? They are in business to make money, but now we have no jobs here.
We have to buy school supplies for our daugther, when I was in school they provided supplies.
Taxation without representation, where have I heard that before?
Time to revolt people.
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Pete3:37PMApr 29th 2008
Mark,
Well I think you stomped Greg on this particular issue. I just wish you focused a little bit more on your second method of lowering prices: decreasing demand.