Saturday, September 3, 2011

Energy Lies—IV

"As President, I Will Lower Gas Prices"

Cost breakdown of gasoline prices 2000-2010
~ Michele Bachmann claims she could get gas under $2/gallon if elected President. Could she do it? How much influence does the President have on the price of gasoline?

The short answer: very little. The slightly longer answer: some, but not of a kind that would make much of a (positive) difference.

The price of gasoline is the sum of 6 components: the cost of crude oil, the cost of refining it, distribution, marketing, profits and taxes. It follows that lowering the price of gasoline must involve lowering one or more of these 6 components. So how could the President do that?

Crude Oil. Crude oil cost is market-driven. It fluctuates a lot, driven by current supply and demand, and also by speculators and market makers who try to anticipate future supply and demand. The factors that go into such prognostication are myriad, and accurately predicting the future price of oil is both incredibly complicated and formidably difficult. The volatility of crude oil prices (and crude oil futures contracts) shows clearly that (1) no one has a very good crystal ball; (2) the situation changes rapidly; and (3) no one person or entity can materially influence the price of oil for any but the briefest time.

Some assert that the US adventure in Iraq is partly or wholly about access to affordable oil, or to maintain stability of supply, and hence price. Vast sums of blood and treasure have been lost in the effort, yet events like the Arab Spring can have as much or greater impact on oil.

The idea that the US has some enormous untapped supply that could be released in a flood to drive down prices is pure fantasy. The amount of conventional oil, whether in deep water or in Alaska, under the most optimistic estimates would provide for little more than a couple of years of US domestic demand. and would be trivial compared to production from other countries. Nor are oil shale or tar sands the answer. There may be lots of technically recoverable material from which oil can be manufactured, but even today it is only feasible where conventional crude oil prices are approximately $80 per barrel or higher. Thus, if the market price for oil stays under $80 for any length of time, investment in and operation of so-called shale plays will taper off. In effect, development and exploitation of such alternative sources of oil cannot and will not drive overall crude oil prices much under $80 per barrel for long. There are also costs in water and energy use which will certainly rise going forward, and add further upward pressure on the minimum per barrel break-even price. Finally, the environmental costs of non-conventional oil are a serious concern; a full accounting that includes currently externalized costs will make it even less competitive.

Refining. Oil is converted into gasoline, diesel, jet fuel, propane, butane, and scores of other products at refineries operated by oil companies, and located in many places throughout the US, including at Ferndale here in Washington State. There are many constituent costs in refining, including input chemicals, labor, and the financing of such vast complexes. Most of these costs are also market-driven and cannot be directly controlled.

Distribution. Getting gasoline from the refinery to the pump is mostly done by tanker trucks, which themselves use fuel to do so. The costs here change little unless fuel or labor prices change.

Marketing. Big Oil spends money trying to convince us that one brand of gasoline is better than another. Are they? Probably not much, but that won't stop the expenditure, and no President is going to change that.

Profits. The idea that our President and Congress would agree to impinge on Big Oil profits is, in the current political environment, unthinkable.

Taxes. The federal gasoline tax is a mere 18.4 cents per gallon, the same rate for the past 18 years since President Clinton increased it by 4.3 cents in 1993. The state tax is often higher, although not generally by much. As the graphic at the top of this post shows, taxes are not so large a component of gasoline prices that they would substantially lower the pump price even if eliminated. Taxes on gasoline are, if anything, too small especially compared to the environmental costs and infrastructure needs of gasoline use.

While the President cannot do much on any of these, he, or perhaps she, can partially affect gasoline prices in some ways:

Regulation. The President could further deregulate the industry, as its lobbyists endlessly demand, but which of the six components above would see a reduced cost thereby? Perhaps refining would get cheaper (at the likely cost of both lives and the environment.) The cost of extracting crude oil might too, perhaps (again with human and environmental costs.) However, the contribution of US crude production to global supply is too small; the slightly lower production cost will not have a material effect on the market-set price of crude. A much more likely result fro lessened regulation would be an increase in profits, not a reduction in the pump price.

Energy Policy. A better overall energy policy is sorely needed to wean the country off its fossil fuel addiction and build alternatives that provide future sustainability. No policy changes of those kinds, however, will do anything to pump prices for years.

The Strategic Petroleum Reserve. Flooding the domestic market with cached supply would lower prices, as has been done before. However, the reduction is relatively small, and temporary, as well as politically difficult.

Bachmann's derangement, such remarks on gas prices highlight her ignorance of the office for which she runs, or perhaps beg the question—what has she been huffing?

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