The Gas Test

As the price of gas passes $4 on its way to $5 a gallon, the finger pointing in Washington, D.C. has reached a frenzy as politicians rush to place blame. “Wall Street profiteers!” “Speculators!” “Big Oil!”

As if on cue, the administration has launched another investigation into charges that speculators are manipulating oil prices – a perennial response of elected officials when gas prices stir anger among the electorate. Previous investigations have found no conspiracies.

What is causing our high gas prices?  To answer that question, let’s start with the basics — something I call, “The Gas Test.”

Grab a pencil and let’s begin.

Question One: How much of the cost of a gallon of gas is the price of crude oil?

Roughly 70 cents of every dollar we pay for gasoline is for crude oil. When the price of crude oil jumped from $68 a barrel last year to $115 this year, gasoline prices spiked accordingly.

Question Two: How much do motorists pay in state and local fuel taxes?

Between 13 and 15 cents of each dollar we pay at the pump is for state and federal gas taxes. Because state gas taxes vary, the tax burden differs depending on where you fill up.

Question Three: What accounts for the other 15 cents?

Refining, processing, transportation, marketing, distribution and retailing costs make up most of the remainder.

Question Four: With the profits the oil companies make, isn’t there some price gouging?

If there is, investigators haven’t found it. The U.S. Federal Trade Commission, other federal agencies and state attorneys general have investigated the causes of price spikes for decades and have consistently found that price increases are due to normal market forces.

Final question: Why is the cost of crude escalating?

That’s an easy one: the law of supply and demand.

The unrest in Libya and Egypt, coupled with strikes by oil workers in Yemen, Oman, Gabon and Ivory Coast, has cut production. Less supply means higher prices.

If our elected officials want to point fingers at who is causing high gas prices, they might want to look in the mirror.

According to Kiplinger Magazine, the United States has enough oil reserves to power the nation for 300 years — without the Organization of the Petroleum Exporting Countries (OPEC). But much of those untapped reserves are located in places that have been put off limits by the government or are too costly to develop.

Environmentalists point to the Gulf oil spill as evidence that deepwater wells are too risky and oil exploration should be curtailed. Ironically, oil companies have been pushed far offshore by federal and state laws that put safer, more readily available oil reserves off limits.

For almost 40 years, elected officials have fumed and fussed over the reason for high gasoline prices, when the answer is clear. When the 1973 Arab oil embargo crippled our economy, the United States imported less than 35 percent of its crude oil. Today, that figure is 57 percent – and the Mideast is more volatile than ever.

High gasoline prices aren’t just an inconvenience. They increase the cost of everything we eat and use, causing hardships for American families and stalling our economic recovery. Suffering at the hands of foreign oil suppliers while we’re sitting on 300 years worth of untapped oil reserves is like a family starving with a basement full of food.

Yes, there is some risk to domestic oil exploration, but the risk — and potential cost — of our current energy policy is far greater.

About the Author

Don Brunell is the president of the Association of Washington Business. Formed in 1904, the Association of Washington Business is Washington’s oldest and largest statewide business association, and includes more than 7,400 members representing 650,000 employees. AWB serves as both the state’s chamber of commerce and the manufacturing and technology association. While its membership includes major employers like Boeing, Microsoft and Weyerhaeuser, 90 percent of AWB members employ fewer than 100 people. More than half of AWB’s members employ fewer than 10. For more about AWB, visit www.awb.org.