Gas
Gas prices are all the rage these days, as well they should be. Here, regular unleaded is going for $4.15 per gallon. Everyone has their opinion, including politicians, on how to fix the “problem”. And being this is a political year, everyone says everyone else is wrong more than usual. But no one seems to see the entire picture. Oil prices are a function of several issues:
— valuation of the dollar
— supply
— demand
— speculation of investors
What republicans say
1. Republicans are running around chanting “dig here, dig now!”, claiming that increasing domestic production of crude oil would lower gas prices. “Hey, there might be oil in Mt. Rushmore! Let’s drill in Abe’s temple to check it out!”
2. Republicans also roll into the same argument our need for additional nuclear power facilities.
3. Eliminate the federal gas tax to alleviate prices at the pump.
Why they’re right
A change in US policy regarding oil exploration would no doubt convince investors that oil prices will go down. Investors will get out of oil, and into other areas; whether it’s the stock market, currencies, or other commodities. In the long run, this will also increase demand, holding all else constant.
Why they’re wrong
Removing restrictions on drilling offshore and in Alaska might pop the speculation bubble, but it will do nothing to increase supply. The fruits of drilling would be years away. Refining capacity is near 100%, so it might reduce oil prices, but not gas prices. Republicans claim free market economics will reduce equilibrium price of oil. But they conveniently ignore a major assumption of free market economics; that there are many buyers and suppliers, and no one entity is significant enough to dictate supply or demand. (Maybe Rush Limbaugh overslept that day.)
When there is one supplier or group of suppliers that have significant impact on supply, it creates a situation with price makers and price takers. With oil, it’s OPEC. If the US begins producing more oil, which would force prices down, who’s to say that OPEC wouldn’t scale back production to raise the equilibrium price. It is in their best interest to manage the supply side.
Some will argue that countries like Saudi Arabia are increasing supply already. Why would they do that if it’s in their best interest to manage supply? The answer is because they’re managing supply, not restricting it. The economists of Saudi Arabia understand that extremely high gas and oil prices will spur alternative solutions, which they don’t want to happen. They are trying to manage the demand for oil as much as the supply.
Eliminating the federal gas tax will only transfer the situation into another realm. One of three things would happen. 1) Government would run larger deficits than current, which would weaken the dollar further. 2) Government would recoup those lost revenues in other places. 3) Those things paid for by the gas tax would be neglected (roads and bridges). Not to mention, lower taxes mean lower prices, which would increase demand for oil and gas, speeding up the problem.
What democrats say
Increase fuel efficiency. Increase investment in alternative energies like ethanol, biofuels, hydrogen, wind, and solar. Drilling won’t increase supply for years. Implement a windfall profits tax on oil companies. Cancel “giveaways” to oil companies that were created in the 2005 energy bill. It’s the oil companies fault you’re paying so much.
Why they’re right
Increasing fuel efficiency and investing in alternative energies will reduce demand. Like the republican example, however, OPEC will realize the reduction in demand and counter-intuitively hold supply the same. This will drive the price lower, which will reduce viable alternative energy types. Drilling now won’t effect any supply/demand issues, however would probably effect speculation.
Why they’re wrong
Government shouldn’t dictate fuel efficiency standards. The “free” market will set them. If fuel efficiency becomes a larger portion of consumer decision making, the manufacturers will adjust production to higher efficiency vehicles.
Ethanol will go down as the single worst mistake of your lifetime. Trying to offset oil is a nice idea. But they can’t produce enough ethanol to make a dent in the price of oil, and they’re transferring corn from one purpose to another. That creates a completely separate set of issues in global corn demand. So it’s not fixing anything, it’s making it worse. Ethanol, for example might reduce oil prices by 2%. But moving corn from feed and food to energy raises costs of corn, beef, and everything else 10%. The only way ethanol will work is if they can produce it from a non-food crop, and that crop can be grown in places crops aren’t grown now. So why is E85 ethanol cheaper than gasoline? Because it is being subsidized by the government.
Taxing corporations will do absolutely nothing. Pop quiz: how much tax do corporations pay? Answer: none. Why? Because corporations pass on taxes to the end user. If a companies taxes go up by 5%, they’ll raise their prices by 5%. Oil companies have an obligation to provide shareholder value, otherwise the value of their organization will fall. They will not sit idly by while government makes them pay more. They’ll either raise prices, or reduce expenses; and those expenses would most likely be from oil exploration and alternative energy research.
What no one is talking about
Oil is traded on the world market in US dollars. A weak dollar means it costs more to buy things. The same investors that are speculating on oil futures are the ones speculating that dollar will remain weak. Huge budget deficits and a weak American economy are convincing investors to buy things other than the dollar. Fiscal responsibility has a huge impact on gas prices.
So what’s the right answer?
All of the above. We need to have access to oil. We need to explore alternative energies that don’t effect other areas of our lives. We need to improve our fiscal policy to give investors more confidence in the dollar. But that doesn’t get you elected. Our antiquated two party system makes everyone take one side or the other. But 15% of the population is on the right, 15% is on the left. The other 70% of us are in the middle, and understand that decisions have trade offs.
Why can I figure this out and the great minds of the world can’t?
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