WITH GAS prices soaring over three dollars gallon, the headlines "pain at the pump" have been broadcasted ad nauseam and Democrats have placed the blame for the high prices squarely on the shoulders of President Bush and former Exxon CEO Lee Raymond (who just received a $400 million retirement package). What is lacking is recognition of the complexity of the current conditions and the many sources of the conundrum, including Democrats and extreme environmentalists. A presentation of the facts, not simplified, flatly false rhetoric for the masses to regurgitate is in shorter supply than crude oil itself.
We've all heard the mantra that goes something like this: Bush and Cheney are part of a shady conspiracy to make their oil cronies rich. Anytime the oil companies make a buck, remember, Halliburton = Cheney = evil right wing ploy to make people choose between gas, food and prescription drugs.
We often fail to realize that oil is a global commodity; the activities of U.S. oil companies have little effect on the world price of crude oil. The oil market is pretty close to a perfectly competitive market, and thus the oil tycoons are essentially price takers. Sen. Chuck Schumer, D-N.Y., has a hard time grasping this concept. On Tuesday, in a speech before the Senate floor, he said, "We all know it's the big oil companies who are causing these massive price increases that go way beyond what supply and demand would merit."
Let's put aside the left-wing spin machine for a few minutes and endeavor to see beyond this nonsensical gibberish. Why exactly are oil prices so high? For starters, simple economics of supply and demand cannot be overlooked. Nations such as China and India have increased oil consumption rapidly as their economies have become more advanced, and supply has not been able to keep up with demand. You don't need a Ph.D. in economics to figure out that the outcome of this scenario is an increase in price. Market instability à la radical Iranian President Mahmoud Ahmadinejad has also propelled prices, fueling concerns of impending nuclear proliferation and conflict.
Some critics have concluded that because of the record increases in earnings during the fourth quarter of 2005, the oil companies must have colluded and gouged customers in light of the panic after hurricane Katrina. Intense investigations by the FTC have put little credence in this charge. Similar inquiries conducted since the 1920s have found scant evidence of malfeasance. Incidentally, the fourth-quarter earnings aren't outrageous when compared with other industries. Oil industry earnings amounted to approximately 8.9 cents per dollar of sales, which is less than half of the earnings of the pharmaceutical and banking industries during the same period and a little more than half of the earnings in the software sector.
People often look at the sticker price at the gas station and forget to put everything in perspective. Over the past 25 years, gas prices have increased 66.8 percent, compared with food (88.7 percent), housing (93 percent), public transportation (108 percent) and medical care (218.7 percent). It's convenient to vilify Big Oil, but the relatively modest increase in gas prices over this time period is due in large part to tax hikes. Manufacturing, distribution and marketing costs have declined, but taxes have increased significantly. The national average excise tax (includes federal and average state taxes) is currently set at 45.9 cents, an increase of 43.9 percent since 1981. One way to ease the price spike is with a temporary federal gas tax holiday, something Congress is considering.
Aside from taxes, environmental regulations have indirectly driven up the price of oil over the years. The goal of a cleaner environment shouldn't be dismissed in order to increase domestic oil production, but the latter shouldn't fall by the wayside to achieve the former. According to the American Petroleum Institute, the oil industry has invested $89 billion over the past 13 years in order to comply with stringent regulations. Refinery capacity has severely declined as a result; about 150 refineries exist in the United States today, while more than 300 were around in 1980. Additionally, overzealous regulations that vary from state to state exacerbate local supply shortages.
Attempts to make gasoline consumption more environmentally friendly also creates temporary shortages and price increases, and this is a trade-off our country has chosen. We must live with the consequences or change the policy. As Energy Secretary Samuel Bodman noted Tuesday in a White House Q&A online forum, the switch from MTBE to ethanol is creating some transportation and distribution barriers, which will be mitigated in the next few months. Also, the transition from the winter blend to the summer blend of gasoline (designed to reduce emissions as people travel more in the summer) decreases supply to an extent in the immediate short-term.
The United States currently imports more than 60 percent of its oil. Increasing domestic production, combined with plans to develop alternative sources of energy and cleaner fuel technology (which Bush's Advanced Energy Initiative is designed to do) would serve to reduce our dependence on foreign oil in the long-term. The first would also increase the world supply, thus decreasing the bargaining power of rogue oil-rich regimes. However, proposals such as drilling in ANWR, which Bush put on the table when he first took office, have been met with stiff resistance by Democrats and environmental lobby groups. The reason? According to Greenpeace's Web site, harm would come to "polar bears, caribou, migratory birds and other animals."
As long as we're willing to prioritize the environment and taxes over national security interests and cheaper gas as well as ignorant rants over economic common sense, the wrong entities will be targeted, prices will stay high and the real culprits will be off the hook.
Whitney Blake's column appears Thursdays in The Cavalier Daily. She can be reached at wblake@cavalierdaily.com.
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