Alexander's Column

Memo to Beltway gasbags — it's called supply and demand

Mark Alexander · Apr. 28, 2006

Ah, it’s an election year, and those dauntless Republicrats are tripping over themselves in the panderfest to see who can proffer the best vote-catcher proposal to protect constituents from “Big Oil.”

Recently, the national average price for a gallon of gas topped the national average price for a gallon of Coca-Cola. For the moment, though, gas is still half the cost of fashionable yuppie-label bottled waters and only a fifth the cost of a gallon of caf? latt?s. And gas does a far better job of propelling your 2,500-pound vehicle 25 miles down the road. .

Of course, we Americans pay far less for fuel than most folks around the world. Current fuel prices in the U.S. put us at #102 – meaning there are 101 nations where folks pay more than we do for a gallon of gas. #1 is Uruguay at $7.38. Europeans are hit hard – #2 is the Netherlands where you can expect to pay $6.73. In the UK a gallon of gas is $6.13, followed by Belgium, Germany, Italy and France, where fuel runs from $6.13 down to more affordable $5.80 per gallon. Almost 60 percent of the cost in Europe is tax.

Of course, there are places with lower taxes and subsidized fuel costs. #139 is Iran ($.30), #140 is Iraq at ($.19) and in #141, Turkmenistan, a gallon of gas is just 11 cents. But there are some other quality-of-life considerations.

Even at $75 per barrel, oil is still $12 less than its inflation-adjusted record price in 1981. (The inflation-adjutsted cost of cars, on the other hand, is up about 400 percent.) But higher fuel prices do put the pinch on some family budgets, especially when a breadwinner has a long commute.

Government to the rescue!

To help voters feel better at the pump, the Demos are floating a tax cut – a 60-day suspension of federal taxes on fuel. They propose to offset the “cost” of that tax cut by increasing taxes on oil companies. In other words, the 18-cent reduction in tax revenue per gallon would be offset by an 18-cent increase in corporate revenue per gallon to pay for the additional federal taxes on oil companies. We call that a wash.

Democrats are feigning concern about hefty taxes on fuel. Indeed, combined federal, state and local taxes on a gallon of gas now average 50 cents – from a low of 26.4 cents in Alaska to a high of 60 cents in California. That’s a bit more than the one-cent-per-gallon “temporary” tax imposed back in 1932.

However, all the Demo hand-wringing counts for little in light of the fact that they’re largely responsible for the high taxes on – and the high cost of – fuel. Consider that during the last decade, House Minority Leader Nancy Pelosi voted for higher fuel taxes five times, and Senate Minority Leader Harry Reid did so 12 times.

But it is the Democrats’ perennial obstruction of new oil production and exploration, and alternative energy sources – most notably, nuclear energy – that accounts for much of the squeeze on consumers at the pump.

For their part, Republicans are, rightly, worried about retaining their congressional majorities in the upcoming midterm elections. Indeed, they’ve one-upped the Demos’ gas-relief plan with a proposal to send a whopping $100 “rebate check” to millions of taxpayers. On top of that, President George W. Bush, who bemoaned America’s “oil addiction” in his most recent State of the Union address, says he will suspend re-supply of the Strategic Petroleum Reserve and ease environmental regulations on fuel. With a little luck, Republicans might re-open debate about oil exploration in one-tenth of one percent of the Arctic National Wildlife Refuge.

Of course, it’s Republicans’ addiction to spending that most threatens their prospects for holding their congressional majorities. If Republicans cut government spending and regulation as they promised in ‘04 and '02 and '00, perhaps consumers could keep enough of their income to pay for alternative automotive and home-energy conservation improvements which lower demand, and thus market price, for energy commodities.

Unfortunately, there is one thing Republicans and Democrats agree on: blaming “Big Oil” for gouging consumers. Demo Sen. Robert Menendez is leading the charge: “It’s crystal clear that the current spike in gas prices is at least partly due to an act of greed.” For their part, House Speaker Dennis Hastert and Senate Majority Leader Bill Frist are demanding that the Justice Department and FTC “investigate any potential collusion, price-fixing or gouging in the sale or distribution of gasoline, petroleum distillates or ethanol in wholesale and retail markets” to determine “whether spot shortages of gasoline are the result of illegal efforts to manipulate prices.”

Notes economist Thomas Sowell, “If there is anything worse than partisan demagoguery, it is bipartisan demagoguery.”

Oil companies are recording record profits – on record sales. In a free-market economy, record sales often result in record profits. Notably, however, the real price gouger is the government. According to the Tax Foundation, in the last three decades government has collected more than $1.34 trillion (inflation adjusted) in gasoline-tax revenues – “more than twice the amount of domestic profits earned by major U.S. oil companies during the same period.”

So what really accounts for high fuel prices? The answer is elementary – what economist Milton Friedman called “world market supply and demand for limited resources.”

On the supply side, current world production is at about 85 million barrels per day, and new exploration around the world has kept that production pace steady. The U.S. consumes about 25 percent of that world production. About 45 percent of what we consume is produced domestically, and 55 percent imported from seven key suppliers: Mexico (17.9 percent), Canada (17.3 percent), Saudi Arabia (14.3 percent), Nigeria (13.6 percent), Venezuela (11.9 percent), Angola (4.7 percent) and Iraq (4.5 percent).

On the demand side, booming economies in China, India and the U.S. (yes, it is booming despite Demo claims) are competing for a limited supply of oil – and will be as long as the economy stays strong.

It is no coincidence, then, that President Bush has met with both Indian Prime Minister Manmohan Singh and Chinese President Hu Jintao within the past month. High on his agenda were energy consumption and competition – which is precisely why the President agreed to assist India with its nuclear-energy program.

China is sucking up all the oil it can import. Hu was in Nigeria and Kenya this week, securing oil leases, and China’s reluctance to support UN sanctions against Iran and Sudan is clearly related to Beijing’s dependence on oil from those nations.

The good news is that about 20 percent of daily production in the Gulf of Mexico is still disabled because of Katrina – good news because as that production comes back on line, domestic oil prices will ease. Additionally, high prices for any commodity tend to reduce demand, which brings the prices down. The price for crude has already started to drop.

The bad news is that Democrats continue to block construction of new refineries. In fact, not a single new refinery has been built in the U.S. in almost 30 years. Demos continue to block pin-point exploration in oil-rich wastelands such as ANWR. Most significantly, though, is that Demos have, for two generations, blocked the development of nuclear-energy facilities.

Even some of the most entrenched environmentalists have reversed their position on nuclear energy. “My views have changed,” wrote Greenpeace co-founder Patrick Moore in conjunction with Earth Day last week, “and the rest of the environmental movement needs to update its views, too, because nuclear energy may just be the energy source that can save our planet…. Every responsible environmentalist should support a move in that direction.”

In addition to the good news and bad news about energy supply and demand, there is also worse news: the supply wild card. As The Patriot has noted previously, this major strategic consideration would justify our presence in Iraq. If Iran’s fanatical Jihadi leader Mahmoud Ahmadi-Nejad decides to lock down the Strait of Hormuz, or al-Qa'ida attacks the Saudi oil fields, the consequences for the U.S. and world economy would be dire. In addition, if Venezuela’s Hugo “Little Castro” Chavez chooses to sell his oil elsewhere, the U.S. would be in real trouble.

Suffice it to say, energy is the life-blood of the U.S. economy. As such, it is our most vital national-security interest. A quick review of the top U.S. oil providers lends some perspective to the complexity of our strategic relationships with those providers. All the partisan political posturing aside, the real “crisis” at the fuel pump is about world supply and demand, however disconcerting that might be.

In the event that a supply wild card is played and the critical balance of our oil supply is interrupted, there will be no easy solution. We are 20 years behind the curve in terms of oil exploration and refinement and nuclear power development, and we will stay that far behind as long as Democrats continue to obstruct the enactment of an intelligent domestic energy policy.