Sunday, June 08, 2008
Domestic production is the answer
From the RoundTable blog
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Jessee Ring
Ring is a full time investor living in Pulaski County.
Gasoline prices at around $4 a gallon are a national crisis. The entire economy is affected. For example, trucking companies have to charge more. Since almost everything is on a truck somewhere along the line, prices go up everywhere. Also, people tend to stay home instead of going somewhere on vacation, so the travel and tourism industry is seriously affected. People cut down spending elsewhere, so the overall economy is hurt.
We need to understand how and why these high gas prices are happening in order to be able to figure out what to do about it.
First of all, let's get past the "evil oil companies" bugaboo. The net profit margin at Chevron, for example, is about 7 percent, in line with many other industries. Some industries, such as the cosmetics industry have profit margins as high as 90 percent. If you go to the theater to see a movie and, while there, you buy a bag of popcorn, you will pay about $4 even though it cost in the range of 25 cents to make. Who is price-gouging?
The average net profit to the oil company on a gallon of gas is about 8 cents. The combined state and federal tax on a gallon of gas averages about 45 cents. This means that out of that $4, the oil company gets to keep 8 cents and the government gets 45 cents. Who is greedy?
Now, let's get back to the cause of the high prices.
Gasoline, like everything else on the market, follows the law of supply and demand. As everyone knows, the higher the demand and/or the lower the supply of something, the higher the price for it goes. Demand is increasing for gasoline worldwide because many more people in China and India can now afford to buy a car. This trend is unstoppable; demand for gasoline will continue to increase worldwide, meaning ever more upward price pressure.
The solution is not for us all to drive less, or to drive tiny cars, or government rationing, or bashing the oil companies, or to ride bicycles, or to pay a big fine if our car gets less than 30 miles per gallon. The solution is to get more oil and gas.
Yes, the only viable solution to $4-a-gallon gas is to increase the supply of gas, which means increasing the supply of oil.
The U.S. has vast known reserves of oil in the Arctic National Wildlife Refuge, the outer continental shelf, and the Gulf of Mexico. Yet all of this oil is off limits due to the direct action of Congress. By thus keeping the supply restricted, Congress is directly responsible for high gas prices.
Congress' response to this issue has been to push ethanol made from corn, thereby causing food prices to go up.
Now we have Congress to thank for both higher gas prices and higher food prices.
The answer is to increase the supply of domestic oil by drilling in all areas, which can be done in an environmentally friendly way nowadays. We can also develop oil shale. One thing is for sure: We cannot bring down the price of oil and gas by turning more corn into ethanol, for crying out loud. Also, we need to encourage the building of more refineries so we can turn all of that additional oil into gasoline. There hasn't been a new refinery built in this country for 25 years because of the difficulty of getting all of the government approvals.
There are many additional benefits that would ensue from increasing the supply of domestic oil. We would be spared the humiliation of seeing the president of the United States having to go to places such as Saudi Arabia and beg for more oil. We would stop sending billions of dollars to thugs and dictators in Venezuela and elsewhere who hate us and wish us harm. We would keep all of that money at home in U.S. oil companies who would pay more U.S. taxes, hire Americans, stimulate our economy and who have our country's best interest at heart.
I urge Congress to start being part of the solution instead of part of the problem. We must develop all of our domestic oil reserves in an environmentally friendly way. This is the only realistic solution to the problem of dependence on foreign oil and high gas prices.
