Joe Armendariz is Executive Director of the Santa Barbara
Industrial Association and the Santa Barbara County Taxpayers
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.
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.
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
2004 Joe Armendariz