Gas Prices – Why Doesn’t The President Do Something?

Filed in Uncategorized by on February 24, 2012 0 Comments

Because gas prices aren’t a thing an American President can “do something” about. Two things account for about 99 percent of the price of gas: the price of crude, about 55%, and the cost of transport, taxes and refining, about 45%. President? About 0%.

There has been much angst since the 20th Republican primary debate ended because the price of gasoline did not become a major topic. The writers feel President Obama is vulnerable on that score. He is not, at least not factually.

The only political entity that can directly, deliberately, and significantly affect the price of crude oil for any extended period is OPEC, the Oil Cartel created initially by Middle Eastern nations during the Carter administration specifically to do exactly that. The nations of OPEC simply agree upon a price, and no other supplier significantly undercuts it. Why should they? It’s a controlled market in which little advantage is gained by competing in price. Everybody will get to sell oil at the agreed price, so price cutting accomplishes nothing.

If 99% of the cost of crude is its price at 55% and transport, etc. at 45%, what causes spikes and drops? Short-term spikes are caused by threats of war, Middle Eastern blockades (Iran just tried to blockade the Straits of Hormuz and raised the price of crude six percent), and a release of American strategic reserve. Obama did that and reduced the price of gasoline less than a dime for fewer than six weeks.

It has been suggested that the solution is to “Drill Baby, Drill!” Since the government does not own the wells, drills, or oil leases, the suggestion is an exercise in futility. The private owners of the oil would simply sell it at market price. Besides that, all the oil fields in the USA produce less than two percent of the world’s oil. Their owners have no incentive to force prices lower, so… gas prices would not be affected.

Short-term spikes are also caused by ozone-haze reduction blends required in the summer. There are a lot of subregions which need tweaks to the formula, and that means large batch gasoline production, and the economies of scale that go with it, disappear in the summer.

Gas prices also go up when the economy improves, because people begin to drive more, and those pesky market forces finally get to do their thing… which immediately ticks off everybody who was touting market forces in January.

Major disaster can affect prices temporarily as well. Prices dropped precipitously when the economy crashed in July of 2008. In less than a month, they went from over $4.00 to about $1.85 a gallon. But it wasn’t just that people weren’t driving. No one was buying anything made of plastic (or anything else, for that matter), and plastic is made from oil. The price of crude went from $140.00 a 44-gallon barrel to less than $30.00.

Everybody who was blaming Carter in the ’70s, Bush in the early 2000s, and now Obama needs to take a seat and learn something. Unless the price of crude changes, or the cost of transport and distribution changes, gasoline prices will change but little, and there is nothing the president can do about it… nothing.

Photo source: Wikimedia Commons

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