Guest Contributor
Joe Armendariz
Joe Armendariz is Executive Director of the Santa Barbara Industrial Association and the Santa Barbara County Taxpayers Association.

Gas is still a bargain...
Today, both sides of the energy equation are fully exercised
[Joe Armendariz] 5/12/04

The media frenzy over gasoline prices have many, mostly on the left, asking what the government is going to do to cause lower prices at the pump. It must be the "greedy oil companies gauging consumers, again". What is interesting, however, is that when you break down the three main components that determine the price of gas at the pump, the cost of crude, the cost of manufacturing oil and the cost of taxes, it is only the taxes that are higher today than 20+ years ago.

HISTORICAL PERSPECTIVE

In 1981, according to the American Petroleum Institute, the total tax (federal, state and local) on a gallon of gas was approximately .30 cents. Today, it is closer to .43 cents. The cost of crude, since 1981, has actually fallen, as has the cost of manufacturing the oil. So how do you explain the rise in gas prices? Well, again, if comparing prices to their level in 1981, the cost of gas is lower, but the dollar price of crude oil is higher today than it was even a few months ago. For example, the cost of crude this past December was roughly $29 per barrel. Now it is between $36 and $38. There are several important reasons for this. None, however, has anything to do with corporate greed or the inherent devilishness of American oil companies.

SUPPLY AND DEMAND

Markets are an efficient institution. So efficient, in fact, that when the supply and/or market demand for a specific product is fully borne out, prices move in a corresponding fashion. This usually happens precipitously as in the case of gas prices. In addition, depending on which side of the equation is the most energized (no pun intended), the price will always reflect and almost always accurately reflect the bias and will do so with ruthless precision.

Today, both sides of the energy equation (supply and demand) are fully exercised. OPEC, out of a desire to maintain higher prices for its member nations crude, is artificially restricting the world supply. In the case of global demand, it too is at its expected peak, not just here in America, as the summer driving season gears up and families prepare to take vacations and fill up automobiles and recreational vehicles, but also, and even more so, in China where that nations economy is growing at such a velocity their demand for energy is stretching the available worldwide supply to its limit.

OTHER FACTORS

Lastly, there are other factors driving up the price of gas that have little to do with OPEC and/or global economic growth. Specifically, these factors include domestic environmental policy (government mandated fuel specifications), domestic politics ("not in my back yard") and basic economics (the low rates of return for refiners). Yet, in spite of all of that, today, particularly in America, gas prices are still lower than they were almost 25 years ago! What other consumer item can make such a claim?

Indeed, that reality is an absolute testament to the innovations of technology as it relates to the oil industry's facility to deliver their product safely to more people at an increasingly lower cost. The American oil industry has done its job very, very well. As for our national, state and local politicians, international monopolists and domestic environmentalists, the same claim cannot be made. CRO

copyright 2004 Joe Armendariz

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