Most people don't have a clue about what it takes, or what it costs, to get fuel from its source to our homes and vehicles. Ignorance has not, and will not, however, deter politicians from attempting to "fix" the latest round of price increases to garner votes for themselves and demonize the fuel industry.
Democratic politicians are blaming "President Bush's friends back in Texas" for the price hikes. According to this line, oil companies are gouging the public and reaping outrageous profits.
According to the American Petroleum Institute, crude oil costs have actually declined from $1.63 per gallon in 1981 to 60 cents per gallon as of last month. What's driven the retail price up are regulations and taxes. As of last month, API reports, the taxes on a gallon of gasoline amounted to 42 cents. That includes an average 18.4 cents in federal taxes and an average 23.6 cents in state taxes. In 1981, combined taxes averaged 28 cents per gallon.
Over the last four years, according to API, the average profit for all American industries was 6.4 percent, while the fuel industry's was 4.9 percent. Last year, profit margins for the fuel industry averaged 6.7 percent, which was just 0.3 percent more than the average for all industries and below the profit margins of many other industries, such as banking, telecommunications and broadcasting.
No new refinery has been built in this country in more than 20 years. Clean air regulations have produced 15 different types of gasoline because of varying state requirements. Instead of producing one type of fuel for every state, refineries must tailor-make 15 different types, adding to their costs.
As the May issue of Consumers' Research magazine notes, "There is no consumer problem so bad that it cannot be made worse by inappropriate public policy." California Democratic Governor Gray Davis is trying to convince President Bush to adopt an inappropriate public policy by lobbying him to impose a temporary cap on wholesale electricity prices in California. Price controls on fuel have been imposed before by Republican and Democratic presidents. All have failed miserably, often making the supply and/or price situation worse.
Many factors contribute to energy price variations. In California, currently the object of attention because of possible power shortages this summer (and because a Democrat governor and his party want to damage the GOP in that state and nationally), higher gas prices are supposedly caused by price gouging. In fact, major reasons for increased costs include explosions and fires that have affected pipelines and refineries, as well as the unique formulation of gasoline the state requires.
As Consumers' Research reports, Midwest gas price hikes were partially caused by problems supplying a new, cleaner-burning gasoline that complies with Environmental Protection Agency standards and also meets the objectives of state and local governments to promote the use of ethanol as an additive. Aggravated pipeline problems and low inventories also helped drive prices up in the region.
Competition will help drive prices down. Costco and Wal-Mart are two major chains that have recently decided to sell gasoline at lower prices. Previous gas price hikes have contributed to self-service options, as well as production of higher-efficiency cars. It cost an average of five cents per mile to drive in 1998. Today, it costs about eight cents per mile, but vehicles get more miles per gallon, depending on car type and frequency of use.
The ingenuity of the American people and our capitalist system will be more effective in addressing our needs and wants than government regulation. Politicians, in an effort to show the public they "care," will be tempted to "do something" to force gas prices down. Such action will only insure that either prices will go up, fuel availability will go down, or both. The market and the behavior of the public offer the best hope that fuel will continue to be both available and affordable. The only experience politicians have in addressing fuel issues is their experience in making the problem worse.