Debunking Five Myths about Gas Prices

An Expanded Look at Five Myths about Gas Prices

This past week I had an article published in the Washington Post called Five Myths about Gas Prices.

I will discuss each particular myth in detail below, but the five myths I addressed were:

  1. Fighting in Libya is sending gas prices higher.
  2. Tapping the Strategic Petroleum Reserve is a smart way to reduce gas prices.
  3. Oil companies produce less in the spring to make gas prices increase.
  4. The Obama administration is driving up gas prices.
  5. Americans can’t live without cheap gas.

Because such articles go through an editing process and must conform to limits on the length of the article, some topics couldn’t be addressed in sufficient detail. Sometimes during the editing process there is a disagreement over what is and is not a pertinent piece of information. This can result in some misunderstanding of the information I am trying to convey.

The article received 153 comments in just a couple of days, after which commenting was closed. Some of the common complaints were that I didn’t sufficiently explain an issue, or that I omitted certain issues. For instance, one person stated that the issue of seasonal blends is more complex than I stated. That’s true, which is why I have written entire articles on the subject. Some people complained that I left out the role of speculators. Actually, I didn’t, and ironically this was one of the myths that I had been asked to look into. My response was that it wasn’t a myth; that speculation does play a role in oil prices.

Some people believe strongly in myths, and when one is busting their cherished myths they can get angry and view you as a liar and a purveyor of misinformation. I suppose for them that justifies the nastiness that sometimes shows up in the comments. Many people seem to need a culprit to blame for high gas prices, but the issue is more complicated than that.

Needless to say, some of the responses were amusing. On speculation, some people suggested that due to my role in the oil industry, of course I was happy to deflect attention away from price gougers and speculators. After all, I am a typical George Bush conservative, and a former oil industry employee who is blind to the dangers of our fossil fuel dependence. On the other hand, some said that since I presently work on renewable energy, of course I am against expanded drilling because that benefits my company. After all, I am a typical Al Gore liberal who knows nothing about the oil industry and believes biomass can replace our current levels of oil consumption. Some people apparently felt that these ad hominem arguments excused them from having to argue the actual points of the article.

So I decided to reproduce the article, but fill in some of the gaps that opened up during the editing process and led to some of the comments. Ultimately, some people will still view this through filters that place most of the blame for high gas prices on ExxonMobil, speculators, or misguided environmentalists. For those people, this expanded article isn’t going to help much. For the people who understand that this is a complex issue, you may find some utility in the expanded version below. As appropriate, I will add commentary that seeks to address some of the common complaints/questions about the article in italics as RR: Comment…

Five Myths about Gas Prices – The Unabridged Version

Gasoline prices have been steadily climbing for several months, and Americans are feeling the pain at the pump. The possible culprits (from greedy oil execs to Mideast turmoil) are as plentiful as the proposed solutions (more offshore drilling, green energy or government reserves). But what is really driving prices up? And what, if anything, can be done about it? Let’s take a moment to fill up on information about our fuel.

1. Fighting in Libya is sending gas prices higher.

Libya is not a big enough global oil supplier for the battles there to have a meaningful effect on gas prices. In the 1970s and early 1980s, Libya was a major U.S. supplier, selling us around 700,000 barrels of oil per day. But today, we import less than 50,000 barrels per day from Libya — a tiny fraction of the 9.2 million barrels per day the United States imported in 2010. Worldwide, the story is no different: Of the 86 million barrels consumed globally each day, less than 2 percent come from Moammar Gaddafi’s regime.

So why are gas prices up? Though Gaddafi’s fate is largely irrelevant to the oil market, unrest throughout the greater Middle East is not. The Persian Gulf region produces almost 24 million barrels of oil per day, more than 25 percent of global oil consumption. The Arab spring that has brought protests to Egypt, Saudi Arabia, Bahrain and Yemen makes markets nervous, and when markets fret over a possible disruption to oil supplies, gas prices rise — whether the disruption materializes or not.

RR: However, as I explained in a radio interview that I did with KSL news-radio in Salt Lake City, there isn’t a lot of excess global capacity relative to a decade ago. Therefore, the ramifications of taking even 2% off the world market will be disproportionate when there aren’t a number of suppliers who can step up and fill that void with increased production. We are drawing down our oil reserves even as demand is increasing, and that more than any other factor explains the rise in fuel prices over the past decade.

Further, many people complained that I didn’t address speculators at all in the essay. If you understand what speculation is, then you can see that I did address it under this first myth. The fact that oil prices would spike on the basis of what is happening in Libya is based on speculation around several themes. This has also been referred to as a “fear premium” because it is based on the fear that the outage will be extensive, that other producers won’t be able to fill the supply gap, and/or that the unrest spreads across this important oil-producing region. But a price increase based on fear is one based on speculation — which also isn’t to say that the speculation won’t materialize.

2. Tapping the Strategic Petroleum Reserve is a smart way to reduce gas prices.

The U.S. government maintains a 727 million-barrel oil reserve — 38 days’ worth at current levels of consumption — to protect against potential supply disruptions. But just about every time prices rise, politicians want to access the oil in the reserve to increase supply and bring prices back down. Sen. Charles Schumer (D-N.Y.), for instance, has been calling for oil releases from the SPR for more than a decade. In a letter to President Bill Clinton in 1999, he requested the release of several hundred thousand barrels a day from the SPR because oil prices had made a “meteoric ascent to nearly $25 per barrel.” He even introduced legislation to make it easier for the Administration to tap into the SPR in order to combat rising prices.

Had Clinton dipped into the reserve then, as Schumer requested, we almost certainly would have gotten a raw deal as prices continued to climb over the next decade. What if that $25-per-barrel oil could be replenished only at $75 per barrel? Tapping the SPR makes the government an oil speculator, and any nation running record deficits that becomes a commodity trader is playing a dangerous game.

The SPR exists to buy time in a true supply emergency. If we use it as a political tool to keep voters happy by attempting to stem rising gas prices, we may be forced to buy back oil at even higher prices, or we may be left with an insufficient supply in a real crisis.

RR: Elsewhere, and again on the radio interview with KSL news-radio, I explained the difference between high gas prices and a true emergency. Before my radio interview, I had filled up my car at a gas station in Hawaii. I paid $4.67 per gallon of gasoline. While prices like that will cause additional financial hardship for many, at least the gasoline was available for purchase. We take this for granted; there is always gasoline at the service station when we need it. When you pull into the gas station and there is no gasoline at any price, then that could start to qualify as an emergency.

Fuel shortages have happened in the U.S. before, and could happen again for a variety of reasons. If a major source of U.S. oil imports was cut off, shortages could quickly develop. The SPR could then be tapped to ease those shortages, and if it appeared that they would be extensive it would buy time to implement emergency measures such as rationing. So the SPR is an insurance policy, and if that insurance is used up just because politicians are hoping to influence the price of oil, we may find ourselves lacking insurance in a time of crisis.

3. Oil companies produce less in the spring to make gas prices increase.

Almost every year, gasoline prices rise in the spring. This is usually preceded by falling gasoline inventories and reduced refinery outputs, leading many to believe that oil companies are constraining supplies to drive prices higher.

But there is a valid reason this happens; indeed it is written into the law. In the spring refiners have to switch from winter blends of gasoline to summer blends. This is based on EPA regulations designed to reduce air pollution in the summer.

Butane plays the biggest role. Butane is a cheap ingredient relative to most components in gasoline, but it boils at low temperatures. In winter, this isn’t a big problem so refiners are able to put more butane into the gasoline. But in summer, butane evaporates from gas, polluting the air while leaving us with less fuel in the tank than we paid for. As temperatures rise, refineries replace butane with more costly ingredients and draw down winter inventories just as beach season begins. So summer gasoline blends cost more to make, and supplies are more constrained since butane is off limits.

An additional factor is that during this seasonal gasoline transition, refineries often do annual maintenance. The timing is driven by a combination of improving weather and moderate demand prior to the start of summer driving season. So the production of gasoline generally falls in the months before summer, leading many to incorrectly conclude that there is a corporate conspiracy at work.

But the same thing takes place in the fall. During the transition to winter gasoline, maintenance takes place and inventories are drawn down. The differences are that this is leading into a season of lower demand, and cheaper butane is coming back into the gasoline blends. So the fall transition doesn’t have the same impact on prices.

RR: For more details on seasonal gasoline changes see my essays Refining 101: Winter Gasoline and Why Summer Gasoline Means Higher Prices.

4. The Obama administration is driving up gas prices.

Sen. Mitch McConnell (R-Ky.) says EPA regulations are a “back-door national energy tax” that pushes prices up. Former Alaska governor Sarah Palin says the White House drilling moratorium shows President Obama’s “culpability in the high gas prices hurting Americans.”

Blaming the president for rising gas prices is nothing new, and it’s a bipartisan tactic. In 2004, Sen. John Kerry (D-Mass.) blamed President George W. Bush for higher gas prices because he continued to fill the Strategic Petroleum Reserve as oil prices climbed.

Just one problem: Even if more domestic access is suddenly granted, it won’t do much to control current prices. The U.S. government has estimated that there are 18 billion barrels of oil in the outer continental shelf of the lower 48 states that are off limits to development. That may sound like a lot, but it is only about 2.5 years of supply for the United States, and it would take several years to allocate leases and drill exploratory wells. Even if the estimated 10 billion barrels of oil in the Arctic National Wildlife Refuge were available for development, today’s policy decisions would have no impact on gasoline supplies for as much as a decade. Obama can’t dictate what you’ll pay for premium tomorrow.

RR: This one elicited a number of hostile responses, many from people who apparently think we can in fact drill our way to energy independence if not for the meddling of environmentalists who work to keep domestic supplies off limits to development. The premise of this point is straightforward, but it apparently strained the comprehension abilities of some. At issue is whether Obama’s policies are impacting gasoline prices. My point is that estimates indicate that there isn’t all that much oil there in the first place relative to our consumption, and even if it is all opened up for development today the supplies won’t hit the market for several years. So what Obama does or doesn’t do today with respect to development isn’t impacting gas prices today.

The single biggest misconception on this point involved readers adding their own additional interpretations to what I said. Since I am pointing out that it would take years to develop and thus won’t impact today’s gasoline prices (which I did write) then I am saying we shouldn’t develop our resources at all (which of course I didn’t write). The latter misinterpretation was often accompanied by a few liberal insults about my inability to think about the future, or about ulterior motives for not developing our resources.

5. Americans can’t live without cheap gas.

Yes, Americans love to drive, and Americans love cheap gas. But across an ocean, there’s a continent filled with people a lot like us who’ve lived with high gas prices for years. They’re called Europeans.

While U.S. gasoline heads toward $4 per gallon, Europeans have been paying much higher prices for years because of high taxes on fuel. This month in Britain, gas hit 6 pounds, or about $9.76, per gallon. Because gas is so dear, Europe’s per capita energy use is half that of the United States, leaving Europe less vulnerable to oil price shocks yet not undermining its citizens’ standard of living.

The United States, built on cheap oil, is much less densely populated than the Old World, with more wide-open spaces to traverse. But that doesn’t mean we can’t embrace some of the things that have helped Europeans keep their gasoline bills down — such as high-speed rail, public transportation and green energy.

In fact, Americans have shown that they can adjust their behavior when faced with sticker shock at the pump. As gas prices rose from $2.31 per gallon in 2005 to $3.30 per gallon in 2008, sales of the Toyota Prius eclipsed those of the Ford Explorer, and public transit use reached a 50-year high. When it costs $30 to fill up a Geo Metro with regular, all options are on the table.

RR: This one also elicited strong responses, mostly along the lines of “I don’t care what Europeans do. We are Americans.” One person pointed out “yeah, but what you don’t say is that European prices are high because of high taxes.” I concluded that this person couldn’t read. Other responses were that Europeans had transportation options that we don’t have here in the U.S., apparently never stopping to wonder why they have some of these options.

I believe that when you are faced with a complex problem, one of the first things you want to do is to see how others have approached the problem. You may decide that their solution isn’t applicable to your situation, but you may find that it is at least partially applicable. In the case of European gas prices, their solution is at a minimum partially applicable. After all, what kinds of cars do you see on European roads? Almost no pickups, very few SUVs, and very few gas guzzlers period. They are behaving exactly as we would in the U.S. after a sustained period of high gas prices. So the most significant thing you can do personally to limit the impact of high gas prices on your budget is to do as the Europeans do: Get fuel efficient.

Conclusions (not in the original article)

It is always an adventure to see my writing exposed to a broad cross-section, many of whom don’t know the first thing about me. The ratio of uninformed comment and just generally insulting comments runs much higher than when I write in familiar locales. Too many people dismiss factual statements on the basis of ad hominem arguments, and I never cease to be amazed at the number of people who will extrapolate what I write, and then attack that extrapolation.

A large number of people also believed that I had ulterior motives for writing this article. At the end of the day, what I am trying to do has nothing to do with any personal financial agenda. Some will believe that, some won’t, but I want to state it clearly in any case. What I want to do is to bring a higher level of understanding to our energy issues so we can make more informed energy decisions. Based on some of the comments, we still have a steep hill to climb, and until more people climb that hill we will continue to have politicians trying to use the SPR as a political tool to appease angry, but uninformed voters.