The Price of A Gallon of Gas

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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  • Shawn

    Global warming debunked? Only by a small minority of scientists bought and paid for by the oil oligarchs. You lose all credibility when you state misinformation like that. And taxes have very little to with gas prices. It has to do with the speculators and mass exportation of refined products to create a faux shortage.

    • No, global warming research has been proven to have not followed the scientific method.  If anything, it was politically motivated and had a lot of bias because pro global warming scientists were competing for government grants-and received more grants with positive research.  

      Not only that, but the statistical methods used to analyze the data have been debunked over and over again.  

      In most scientific studies, all the research is an open book so scientists can replicate it.  Not so in global warming.  

      Throw the politics out of it-the research has been discredited.  If there is global warming, it has been shown to be a part of a larger cycle that is not correlated to mankind and “carbon”.  

      In addition, speculation has no influence on gas prices. Speculators are generally net short when prices go up, and net long when prices go down. While a large speculator can influence the marginal price for a short period of time, supply and demand rules the market. When the price of oil crashed in 2007 from 140/bbl to 35/bbl, was it the speculators or the supply demand effects of the market?

      • Bear

        um no, each year global warming is being proven correct.  global warming deniers are right up there with the flat earth society.

        • Bear, keep worshiping at the global warming altar. You are just wrong.

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  • Lobber10

    There is a nuclear power plant being built in Georgia as we speak. Also, do you disagree that fracking  is harmful to the environment? Your tone seems to suggest as much, but you don’t come out and say it.

  • Captain_Willard

    Obama’s exploration ban must be why North Dakota has more holes than a sieve, and natgas prices are plummeting through the floor.

    And how fortunate that politics and economics doesn’t enter into the ‘skeptic’ argument against global warming –

  • Uncle Joe

    There is a fair amount of gas & oil in North American that has yet to be exploited, but I wouldn’t characterize much of it as ‘easy to get at’. Extracting oil from the tar sands in Canada isn’t profitable if gas prices are $2/gallon. You brush off the environmental concerns & blame the EPA, but the track record of businesses voluntarily caring for the environment is beyond abominable. You don’t seem to remember the days when rivers literally caught on fire. You claim that nuclear power is safe & clean, but I’d like to hear how you plan to store the waste. Probably not in your backyard.

    I was feeling skeptical of your arguments until you threw out the line about global warming being debunked. You might as well tell me evolution has been debunked. Speculation has played a role in the price swings of gas, but global demand is the shifting tectonic plate that is pushing our price at the pump higher & higher. Gas was at $4.12/gallon in 2008. The price crashed because of the economic slump. That was a temporary reprieve.

    Our long term goal should be increasing energy efficiency, along with a plan to wean ourselves off of fossil fuel. 

    • If you read my breakfast links today, you will see global warming is definitely debunked.

      East to get at-Alaska has easy to get at oil. Illinois has easy to get at coal. The Gulf has easy to get at oil.

  • DontBeDumb

    Your logic ignores the ultimate futility of mining an unsustainable resource to maintain an unconstrainable population.

    And you’ll find yourself on the wrong side of history when it comes to the impact of carbon dioxide on climate change.