Why High Gas Prices?

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The government has no business stockpiling anything, including oil. But when three socialist amigos like Senators Charles Schumer of New York, Barbara Boxer of California and Harry Reid of Nevada all urged the Bush administration recently to help ease gasoline prices by releasing oil from the Strategic Petroleum Reserve (SPR), you know what’s up. These three are all facing the voters come November, and they know from their many years in politics that nothing agitates the boobeoisie and engenders conspiracy theories like high gas prices.

Reid is "extremely concerned" and believes that gasoline prices in Nevada may be going up because of "possible market manipulation" and price gouging. "The big oil companies say it’s just a matter of supply and demand. That’s the same thing Enron said," Reid told the Las Vegas Review Journal. "I don’t think we can take the word of the oil companies."

Philip Verleger, from the Institute for International Economics believes that draining the SPR might lower prices 20 cents per gallon, plus another 10 cents if the reserve were not replenished. Thus Mr. Reid would like to do just that to give motorists some relief while he and his friends on capital hill start their oil company—witch hunt. You’d think that Martha Stewart owned Exxon the way he’s acting. Reid forgets that Bill Clinton tried that trick in 2000 and the effect at the pump was negligible.

Of course, if the good Senator really wants to give Nevada drivers some relief, why not suspend gasoline taxes? The federal tax on gasoline is 18.4 cents per gallon. Then the State of Nevada, on top of that, levies another 33.7 cents. That’s 52.1 cents a gallon going to the government. Thus residents of the Silver State today pay the third highest gasoline tax in the nation — behind only New York and Hawaii. Of course, Californians pay nearly as much as Nevadans — over 50 cents per gallon. Interestingly, the three Senators looking to drain the SPR for their political gain are from states with the highest gasoline taxes, as well as the highest gas prices in the nation.

Unfortunately government’s impact on gasoline prices doesn’t stop with taxes. Stringent new blending regulations have served to curtail the amount of gasoline being imported from foreign refiners. "Some overseas refiners may be unable to meet new U.S. fuel-blending specifications," wrote Leia Parker in the March 29th Barrons. "Others may simply be unwilling, preferring to send their fuel to Asia, where demand is rising, too."

The Environmental Protection Agency has lowered the amount of sulfur allowed in gasoline. At the same time, the additive methyl tertiary butyl ether has been prohibited in gasoline sold in California, New York and Connecticut due to water-contamination concerns. As Parker reports, these states have substituted ethanol which is more difficult to transport and can not be blended in refineries.

The EPA’s sulfur rules will likely limit imports by as much as 150,000 barrels a day according to A.G. Edwards senior analyst Bruce Lanni. Because inventories are thin and demand is high, the 150,000 barrels, which is 1.7 percent of daily U.S. demand, could cause big price increases.

The American Automobile Association issued a press release questioning the federal governments policies on gasoline refining that have resulted in more than 15 different varieties of gasoline being used across the country. "While these u2018boutique’ fuels have helped clean the air, they also have seriously hampered the efficient production and distribution of gasoline," AAA said.

That’s a gutsy statement from AAA, essentially questioning the value of cleaner air. Sierra Club members must be in Joan Crawford—mode after hearing those comments. Of course, AAA represents 47 million average Americans, who only want to be able to afford driving their cars.

Finally, because of government restrictions, oil production in the United States is in decline while demand continues to accelerate. According to the Oil and Gas Journal, U.S. proven oil reserves have declined by around 20% since 1990, with the largest single-year decline (1.6 billion barrels) occurring in 1991.

During 2003, the United States produced around 7.9 million barrels per day (MMBD) of oil, of which 5.7 MMBD was crude oil, and the rest natural gas liquids and other liquids. U.S. total oil production in 2003 was down sharply (around 2.7 MMBD, or 25%) from the 10.6 MMBD averaged in 1985. U.S. crude production remains near 50-year lows.

Harry Reid and his friends in the Senate are the ones gouging customers at the gas pump, not the oil companies.

Doug French [send him mail] is executive vice president of a Nevada bank and a policy fellow of the Nevada Policy Research Institute.

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