Friday, 29 August 2014 13:01

Why Aren't Gas Prices Lower?

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With gasoline prices averaging, according to the AAA Motor Club, just $3.43 a gallon as of August 28, Clifford Krauss celebrated the “new American oil bonanza” in an article for the New York Times. Unfortunately, Krause is behind the times and only half right. The “new” American oil bonanza is not new, nor is it confined to oil. The first economical natural gas shale fracture was completed in 1998 by George Mitchell’s company, Mitchell Energy, using slick water fracturing. Since then, natural gas from shale has been the fastest growing contributor to total primary energy in the United States, with crude oil extraction from shale right behind.

Happily, Krause got the rest of it right when he noted that these are the lowest gasoline prices of any Labor Day weekend since 2010 and, without the development of fracking and horizontal drilling, gasoline prices would probably be twice what they currently are.

The combined oil production of the three largest oil fields in the United States — Bakken, Eagle Ford, and Permian Basin — is nearly 4.5 million barrels per day, up from just one million barrels per day as recently as 2008. In July of that year, the average price per gallon of regular gasoline in the United States was $4.11.

So, with all of that increased production, why haven’t gasoline prices dropped even further?

Part of the answer is the turmoil in the Middle East, which has removed from world supply an estimated 2.8 million barrels a day. Part of the answer is the enormous increase in demand for energy across the planet. According to the Energy Information Agency and the U.S. Department of Agriculture, the world’s gross domestic product (GDP) has increased by more than 24 percent in just the last 10 years, while energy supply has increased less than five percent in that same period. Put simply, the enormous increases in energy supply in the United States have not been enough to keep up with the world's demand for energy.

And then there are federal and state excise taxes. On the federal level they add 18.4 cents to each gallon of gas, while on the state level they add between 30 and 70 cents per gallon, depending on the state. For example, Alaska’s gasoline tax is 30.8 cents per gallon while California’s is 71.3 cents. The cheapest places to buy gas in the United States are in the southeast states of South Carolina, Mississippi, Virginia, Louisiana, and Alabama, where gas is less than $3.20 a gallon. On the other end of the scale, in Alaska gas is $4 a gallon, while gas in Hawaii is more than $4.28 a gallon.

Perhaps a better question to ask is: Why aren’t American motorists paying more for gasoline than they are? After all, in Switzerland citizens pay $7.29 a gallon while drivers in France pay $7.52 a gallon, and drivers in Germany pay $7.72 a gallon. In the United Kingdom, motorists pay $8.09 a gallon, while Italian drivers pay an astonishing $9.12 a gallon. The answer to that question is simple: Despite paying an average of almost 50 cents in federal and state excise taxes per gallon of gas, American drivers are enjoying the benefits of a free market that allowed the development of a technology to access oil and natural gas reserves 10,000 feet below ground that would have otherwise remained locked up. It was the combination of private capital, private property, the rules of law and contracts, and economic incentive that caused George Mitchell to invest the last years of his life and almost all of his money in developing the technology that drivers are enjoying today. “If it weren’t for that,” said Scott Sheffield, chief executive of Pioneer Natural Resources, one of the most aggressive producers in the Eagle Ford Shale development in Texas, “we would be seeing $200 a barrel oil or higher and $7 to $8 gasoline prices.”

Drivers pulling out of their driveway and heading off to enjoy the Labor Day weekend are, without knowing it, enjoying the fruits of private American enterprise, which has not only made their trip possible, but affordable as well.

 

A graduate of Cornell University and a former investment advisor, Bob is a regular contributor to The New American magazine and blogs frequently at www.LightFromTheRight.com, primarily on economics and politics. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

3 comments

  • Comment Link Randy Saturday, 30 August 2014 23:59 posted by Randy

    I call Bull Ship…. say it how ever you want……..Greed is the deal! here & has been for many years. Greed is an addiction like?????? We will never get a straight answer on anything. Pretty much, if you see anything on the news these days, it usually means your just getting your daily dose of propaganda from your former government who has sprouted horns and a forked red tail……Down with them ALL….Drive them all OUT & Start Over! Of course, my response is simplistic……these hoards of money & influence the Barons are sitting on will not go away for many generations, meaning…..we are stuck with them as long as they and their off spring breath…however…...

  • Comment Link Old Mullet Friday, 29 August 2014 21:58 posted by Old Mullet

    Once again we, American citizens are being "channeled" to look at "gasoline". Has anyone heard the government halting jet aircraft missions or commercial flights due to low supplies of fuel? Sure, prices go up and down. If they keep it bouncing we will be good little bobble heads and pay at the pump whatever it takes to go, go , go. There have been several alternatives to petroleum based fuels as well as better engines for vehicles of all types. Take the Stirling engine for example. Anyone can build a working model. They run on heat from ANY source. The military has made studies and field trials (check youtube) on custom built engines for trucks and cars. There is no pollution, except from whatever provides the heat. Very little lubricant is used and very low heat is built up from the process. Yet, the engine disappeared. Studies were either shut down or made secret. Taxation is the reason for petroleum products fueling our vehicles, massive amounts of taxation. (And, of course, the billions of spin off products and services to keep "us" running).

  • Comment Link Charlie Friday, 29 August 2014 20:44 posted by Charlie

    I think the reason our prices are not lower is because the the supply and demand of the commodity in the ground does not matter. What matters is the supply and demand of oil futures traders, and that dictates the price. Another reason is margins are set too low. Where else can you control approximately a 100k invest with only 5% down? Another reason...look at institutional investing channeling oil futures into government pension plans, sovereign wealth funds, university endowments, etc. If the oil bubble pops, pension funds will take a big hit and that is not what the powers that be want to happen...regardless of supply. Bottom line, we could have oil coming out of our ears and if the futures traders can drive the price up it will move up. How do you fix this crippling impact on the middle class? Increase margins, enforce strict limits, and get the institutional investors out of the game.

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