Gas Prices and Political Hot Air

The recent sharp increase in retail gas prices has once again caused some members of Congress to blame President Bush and criticize oil companies for gouging and profiteering. The politicians are revealing their own economic illiteracy, and they are deliberately attempting to confuse their constituents with misleading and untruthful information on the causes of fluctuations in oil and gas prices. Political hot air will not bring down gas prices.

Last week Sen. Charles Schumer (D-NY) claimed that gas prices are rising because too many oil companies have been allowed to merge in the last decade. If one could identify 100 factors responsible for causing high gas prices, mergers would be number 101.

Fifteen additional Democratic senators, including Minority Leader Harry Reid (D-NV) and Sen. Hillary Clinton (D-NY) also got into the hot air act. They wrote a letter to President Bush, asking him to support anti-price gouging legislation, solve the "dangerous problem" of dependence on foreign oil and join them in an "emergency bipartisan national energy summit." Their solution? Increase consumer access to biofuels, alternative fuels and energy efficient vehicles. That sounds good on camera, but it does not address the problem.

This week House Speaker Dennis Hastert (R-IL) and Senate Majority Leader Bill Frist (R-TN) wrote their own letter to the president, asking Bush to call for a Justice Department investigation into alleged oil company price gouging. Senators Arlen Specter (R-PA) and Carl Levin (D-MI) renewed demands for a windfall profits tax on oil companies’ earnings Levin characterized as "extreme" and "obscene."

In the real world outside Congress, many market, regulatory and tax factors contribute to fluctuations in the price of a barrel of oil or a gallon of gas. The three biggest factors are basic supply and demand, refining capacity and market uncertainty.

First, it is imperative to understand that oil is a product whose price is set by the global commodities market, and the price fluctuates every day. Worldwide demand for oil is skyrocketing due to increased economic growth in developing nations, particularly India and China. India’s annual growth rate is 7 percent; China is growing at 9 percent annually. Each country has over a billion people. Due to increasing worldwide demand for crude oil, the International Energy Agency has stated that this year the OPEC nations will have to produce about one million barrels a day more than previously planned.

Second, U.S. oil refineries are currently not operating at full capacity. Not all of the Gulf Coast refineries damaged by Hurricanes Katrina and Rita are fully operational, but reports state that most should be back online in the coming months. In addition, many Gulf Coast refineries are undergoing routine maintenance that was either scheduled for this spring or put off following the hurricanes to keep the nation supplied with as much gas as possible during that critical time.

The third factor contributing to increased oil and gas prices is market uncertainty, caused by barrel-rattling rhetoric from Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez. Ahmadinejad is taking steps to acquire greater nuclear capability for Iran, and has said of Israel that the "Zionist regime is bound for destruction."

Meanwhile, Chavez is telling other South American leaders that the U.S. is plotting to overthrow his government so it can control Venezuela’s oil. He has threatened to "blow up our own oil fields" if the U.S. launches a military attack against him. Experts claim that market uncertainty caused in part by Ahmadinejad and Chavez currently accounts for $10 to $15 of each barrel of oil.

The tragedy – produced by the political hot air – is that Congress could have taken steps long ago to avoid high energy prices, but they lacked the will to do so.

The first step to meeting our long-term energy needs is to increase production and refining of U.S. domestic oil supplies. The U.S. currently imports over sixty percent of the crude oil it consumes, leaving our economy too dependent on the whims and rhetoric of fanatical foreign leaders and terrorist organizations. Increasing our domestic supply will lower energy prices, and will provide us with a supply hedge against times of national catastrophe and trouble in other parts of the world.

A second step to controlling gas prices in the long-term is to lower state and federal gas taxes to an amount that pays only for new infrastructure and improvements. The consumer is burdened by an average state and federal tax bite of 46 cents per gallon. If you thought all your gas tax dollars were earmarked for infrastructure improvements you are sorely mistaken. According to Citizens Against Government Waste, pork-barrel projects in the 2005 Transportation Equity Act totaled more than $24 billion.

The solution to meeting our long-term energy needs starts at home. We must tap our domestic oil supplies, increase refining capacity and lessen the tax burden on American consumers. Otherwise, the price we pay at the pump will be overly controlled by worldwide supply and demand and the pontifications of pipsqueak potentates. Hot air from our elected officials will not lower gas prices. The refusal by Congress to consider common sense, market-based solutions to rapidly escalating energy prices is failing the American people.