The Price of A Gallon of Gas

Posted by Jeff Carter
on February 15th, 2012

Gas prices are up over the last three years. There are economic reasons why, and it’s not demand driven. A lot goes into the price of a gallon of gas. They are talking $4 buck per gallon gas this summer. All people have to do is come to Chicago and you can pay $4 today! Most of the cost is taxes.

Ironically, as the media fans the fear flames of higher gas prices, Congress is deliberating a new highway bill. Highway bills are among the most pork laden bills passed in Congress. A Christmas tree of blacktop and cement. In a trade off, Republicans trade projects in their states and districts for gas taxes that support unions. True sausage making at its finest.

When we look at the price of gas today($RB_F), there are many factors that figure into that price. Demand for gas is plummeting. Crude oil ($CL_F) prices have been all over the map. With the recent tension in Iran, they are poised to go higher. Last year, it was the Arab Spring that put upward pressure on prices. However, all that social pressure ignores Obama’s domestic policy on energy. His policies and regulations via the EPA have constrained the supply side of the market, putting even more upward pressure on price.

What goes into that supply side? It is simply more than exploration which Obama has banned. There are bottlenecks in the supply chain because the US doesn’t have the necessary refining capability to keep up with domestic demand. Our country hasn’t built a new refinery since the 1970′s. That puts huge pressure on existing refineries to generate output. That causes what Operations Research pros call “whip” in the supply chain. A little kink at the top creates a lot of volatility at the bottom. Think about how you crack a bullwhip and you will get a mental picture.

We know we have oil in all kinds of places in the US. Alaska, government land in the west, and the Gulf of Mexico all have easy to get at oil. Why aren’t we drilling for them? Companies ($BP, $XON, $COP) would love to go get that oil but are prohibited by federal edicts. Simply doing that would put downward pressure on price because we would be increasing supply.

Additionally, we have found new supplies of natural gas ($NG_F) all over the country, but the EPA is making it awfully tough for companies ($EOG, $CHK, $DVN, $APC) to get at them. Already we are seeing regulations, congressional hearings and left wing media stories on the dangers of fracking. In response to all the new supply, the price of natural gas has screamed lower and stayed there. As much money has been lost on the bullish natural gas trade as the bearish US Treasury bond trade.

When did America build it’s last nuclear power plant? If you said before 1974 you are correct. Nuclear energy is incredibly efficient. It’s also incredibly safe notwithstanding the Japanese events of last year. But, government hasn’t allowed power plants to be built. That constrains the total supply of energy putting upward pressure on gas prices.

Instead, over the past three years government has made useless and money losing bets on green energy. Even worse, the money went to cronies of the President.

If you say that we need to do all this green stuff because of global warming, you have been living under a rock. Global warming has been debunked. If you say we should pursue alternative energy because of pollution, that’s silly logic too. Our air, water and environment have never been cleaner. We might have more trees here in the US now than we did over a century ago.

Government subsidizes a non efficient form of energy, ethanol, and we constrict the use of efficient energy, fossil fuel and nuclear. That’s why we will see $4 per gallon gas. Get a major supply chain disruption, like all out war in the Middle East and you will see gas prices go over $5 per gallon. There just isn’t enough elasticity in the supply chain to prevent it.

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