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Republicans and Gas Prices: Look in the Mirror

Abandoning free market principles won't bring down prices at the pump

Samuel Staley
April 26, 2006

Watching Republicans jockey for a lead position to bash oil companies and rein in gas prices is-well-bizarre.

President Bush, House Speaker Dennis Hastert, R-Ill., and Senate Majority Leader Bill Frist, R-Tenn., have all promised to investigate price gouging, though they know that isn't what is driving up gas prices. And Republican Sen. Arlen Specter, R-Pa., wants to tax the "windfall" profits of oil companies.

Of course, I gave up the notion that Republicans stand for free markets long ago (see steel, lumber and fish tariffs and farm subsidies under Bush for a few of the more recent reasons). As politicians think about the next election, which is always just around the proverbial corner, they are all too willing to trade free market principles for political expediency.

But the saber rattling over high gas prices is taking political chutzpah to another level. Republicans are asking oil companies to financially disembowel themselves over a supply disruption they largely created. And that's why the politics surrounding oil and gas prices is so bizarre.

Gas prices have soared, rising 25 cents in just two weeks and breaking the $3 per gallon psychological ceiling in many cities.

But, this begs the question: What's causing prices to drive up?

One factor is the rising demand that always comes with summer. Gas prices spike in the spring regardless of who's in charge. We tend to drive more in the summer as we go to the beach or lake, visit relatives, or cruise in the countryside. So, prices increase (as they are supposed to) to keep demand in line with current supplies.

Another, more important factor, is a cumbersome transition to a summer gasoline mix that includes ethanol. The transition is longer and more difficult than usual since suppliers are replacing MTBE, an additive that is now banned in several states because it can leak into water supplies. Ethanol, unlike MTBE, cannot be delivered by pipeline and mixed into gasoline at refineries. Instead, it is delivered by truck, rail, or barge and mixed with gasoline at regional distribution terminals.

This has introduced temporary, scattered logistics problems. For example, tanker trucks that would normally be used to deliver gasoline to filling stations are being diverted to deliver ethanol to terminals. Also, terminal owners must completely drain their tanks and pipes of MTBE-laced gasoline before switching to ethanol. The result? A temporary shortage of gasoline for retailers which drives up the price.

The third and most important factor, is what pundits are calling "geopolitical uncertainty."

We are at war in Iraq and still have troops in Afghanistan. Iran wants to rattle our bones by going nuclear and the world is wondering if we will militarily strike them to prevent it. Throw in an anti-Bush politician in charge of Venezuela (our fifth largest supplier of crude oil in February) and the political instability in Nigeria (our fourth largest supplier of crude oil in February) and at least one-fifth of the price of a barrel of oil on the world market is attributed to geopolitical uncertainty according to oil industry analysts.

That means two of the three drivers of today's higher gas prices —the ethanol mix and geopolitical uncertainty—are policy-driven. Guess who's in charge of federal policy? Republicans.

So, here's what the oil companies face: gas prices usually spike a bit before the summer as the market's way of keeping us consumers in line with the supply of gasoline. But, on top of this, federal policymakers have infused loads of uncertainty and new costs into the oil and gas industry by helping create today's highly charged international political environment.

What would happen if we taxed these revenues away? Well, when a windfall profits tax was imposed on the oil industry in the 1980s, investment in domestic oil research, development, and exploration plummeted. We became even more vulnerable to shifts in world oil supplies and disruptions in the energy supply chain.

A windfall profits tax also won't topple a Venezuelan president, stabilize Nigeria, rebuild Iraq, or keep Iran from going nuclear.

So, here we sit, waiting for President Bush to launch an "investigation" into higher gas prices.

If you are upset about high gas prices, you're going to benefit more by selling your SUV and buying a hybrid than you will a Congressional investigation. Let the market sort itself out.

If federal policymakers really want to calm oil markets and bring gas prices down, their efforts would be far better invested in stabilizing the Middle East and creating a more certain, trade-friendly international economy and political environment.


Samuel Staley is Research Fellow


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