$6 Per Gallon Gasoline

As gasoline prices continue to rise across the country, and analysts predict $5 or $6 gasoline in the near future, people are wagging fingers and looking for relief at the pump. The last time gasoline prices were higher than now was back in 2008 – right before the global economy walked right off a cliff and sent oil prices plummeting. Around that same time, and at the height of a contentious presidential election (sound familiar?), politicians offered a gas-tax holiday, a pillaging of the National Strategic Petroleum Reserve, and “drill, baby, drill” as solutions to high gasoline prices. There have even been some calls for specific-priced gasoline (do I hear $2 gasoline? or $2.50?). Perhaps unsurprisingly, these “solutions” are nothing but sound-bytes designed to win votes, not save consumers money or reduce our consumption of gasoline.

So what drives oil prices? What won’t work and what will work?

International Instability Affects Oil Prices

The economic aftermath of 9/11, the 2008 stock market crash, massive unemployment or the 2011 Japanese earthquake, tsunami and Fukushima nuclear disaster, and hurricanes have all had measurable effects on oil prices. It’s pretty well established that international instability and uncertainty of how markets will respond to such events play a big role in oil prices (like the ongoing saber-rattling by Iran, and the continuing effects from the “Arab Spring“).

Gasoline Prices and Select Important Events - Data from EIA 2012

More Domestic Oil Drilling Doesn’t Cut Gasoline Prices

Domestic oil production here in the U.S. has been increasing since 2008 – a first since the 1970s, . Despite these higher levels of production, we’re still seeing gasoline prices go up. Because oil is traded on a global market – if domestic oil producers can’t get top-dollar here in the U.S., they sell their products overseas – more domestic production doesn’t mean lower prices. In 2011, the U.S. became a net exporter of refined petroleum products for the first time in 62 years. Even if we expanded oil production even more – it wouldn’t help Americans much. In 2008, the Energy Information Administration, under the direction of President George W. Bush, found that if all the oceans were opened for oil drilling, consumers might see a 3 pennies per gallon of gasoline savings – in the year 2030. Although, that didn’t stop President Obama from offering to open up vast portions of the Atlantic and Pacific ocean for offshore oil drilling in March 2010. What did stop President Obama from opening up our previously protected oceans was the BP oil spill in the Gulf of Mexico.

Meanwhile, the Keystone XL pipeline won’t help lower gas prices at the pump either. If constructed, this pipeline is expected to carry Canadian tar sands oil across the Heartland to oil refineries on the Gulf Coast. This pipeline is actually expected to increase gasoline prices in the Mid-West by $0.10-$0.20 per gallon because the refined oil products will be exported to higher paying customers.

So why the fervor to drill more? While the additional domestic oil drilling wouldn’t help John Q. Public at the gas pump, it sure is financially lucrative for multi-billion dollar international mega corporations. That, and politicians believe they can be shielded from the public’s wrath if it at least appears as though they’re doing something to help.

Gasoline Taxes Aren’t Why You’re Paying More at the Pump

A common cry is that gasoline taxes are just too high, so we need to either cut those taxes or temporarily remove them. Some form of a federal gasoline tax has existed since at least the 1930‘s, and every president since Reagan has been increasing the tax. The federal gasoline tax mostly goes to pay for the highway system we drive on. NPR has a great infographic about what all goes into the price of a gallon of gasoline. Come to find out, federal taxes on a $3.83 gallon of gasoline are just $0.184 per gallon – or less than 5%. This 18.4 cents per gallon tax has been flat since 1997 when gasoline was a measly $1.20/gallon. Sure, we could save 18.4 cents per gallon by scrapping the tax, but we’d end up paying for the federal highway transportation system some other way (higher income taxes, perhaps?).

The Strategic Petroleum Reserve Can’t Help Much Either

The U.S. federal government stockpiles crude oil in case of a national emergency. The Strategic Petroleum Reserve contains more than 700 million barrels of oil, bought and paid for by your taxpayer dollars – a huge subsidy to the oil industry. The U.S. consumes about 20 million barrels of oil daily – so the SPR contains about 35 days worth of supply. Presidents have released petroleum from the SPR in 2005 (after Hurricane Katrina), 2008 (after Hurricanes Gustav and Ike), and most recently in the summer of 2011 (in response to the instability in the Middle East). The Cato Institute has noticed that when the U.S. releases the SPR, the Saudis simply reduce oil output – so global supply stays tight, and prices stay high. The Heritage Foundation put together a pretty telling chart (below) about what happens to gasoline prices after the SPR is released (e.g., not much). However, what the chart fails to show is that there was an overwhelming concern globally about how the Japanese earthquake would dampen that country’s appetite for crude oil – oil prices were dropping globally because of speculation on the Japanese demand.

The Only Real Solution to High Gasoline Prices: Cut Back on Oil Consumption

Whether it’s market speculation, massive political unrest in the Middle East, demand decline in a natural-disaster ravaged country, or the worst economic disaster since the Great Depression, there are many factors that are simply out of our hands when it comes to the price of gasoline and oil.

However, we do have control over how much gasoline we purchase. By using simple conservation measures (properly inflating your tires, driving the speed limit, and not driving aggressively), people can control their personal fuel consumption and reduce their overall costs. Updated Corporate Average Fuel Efficiency (CAFE) standards can also help – like President Obama’s new 54.5 mpg standard by 2025. Better yet, taking public transportation, riding a bike, walking and eliminating unnecessary car trips, can also reduce gasoline costs. But perhaps the best solution is to turn away from oil completely, and rely on electricity for our transportation needs.

SACE has been afforded the opportunity to drive around a Nissan LEAF since October 2011. This car is 100% electric, has about 100 mile range and does not rely on gasoline. A full charge costs about $2.40 to drive 100 miles in a LEAF – effectively $0.80 per gallon of gasoline equivalent. As more renewable energy is used to generate electricity, our cars will be powered by completely clean energy (like solar panels or wind turbines instead of dirty fossil fuels). To be sure, there are a lot of hurdles to overcome before electric cars dominate the car market here in the U.S.; however, the benefits of electrifying the fleet (among them, lower “fuel” costs) clearly make this a worthwhile endeavor.

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