Pete Sepp is executive vice president of the National Taxpayers Union.
Fuel price increases are causing a flurry of activity among federal policymakers, who are scrambling to release statements and criticisms designed to diffuse and deflect voter anger. As Congress and the president go through the motions to appear as if they're "doing something" to address this recurring concern, a more prudent use of time might be to examine the causes of—and remedies for—high U.S. energy prices.
[Check out editorial cartoons about gas prices.]
To dissect fuel costs, it's important to identify each element involved in setting prices. According to data from the U.S. Energy Information Administration, regular gasoline prices are largely attributable to four factors: 1) the global price of crude oil, 2) taxes, 3) the costs of distributing and marketing the product, and 4) the cost of refining.
The price of crude oil accounts for 76 percent of the costs Americans face at the pump, making it the elephant in the room for our purposes. And like the real animal, this elephant behaves with instinctive caution toward what lies ahead. Because crude oil straight out of the ground doesn't go directly to the market for consumption, traders must predict what the demand will be after refinement, weighing it against the current and future supply of crude oil. This element of pricing is behind the spike we're seeing today.
[See a collection of political cartoons on energy policy.]
Uncertainty with the major oil producing nations of Iran and Syria has raised questions over whether future supplies will remain constant or decrease as a result of military actions and sanctions. Therefore, even though the present supply of oil is unchanged, the price of crude oil is increasing. But where problems lie, there are also opportunities.
North America is teeming with new energy potential, thanks to recently-developed drilling techniques that have made previously unrecoverable resources viable. By increasing America's ability to contribute to the global oil supply through responsible exploration policies, federal officials can help to put downward pressure on the price of crude.
If President Obama were to come forward with a strong commitment to increase U.S. oil production by carefully permitting development in selected offshore and Alaskan areas, our nation could make more progress toward becoming a price leader rather than a price follower.
[Read Mort Zuckerman on America's Energy Future.]
Despite a U.S.-Mexico agreement to open up 1.5 million acres in the Gulf to oil development, the administration's drilling policy still effectively places a moratorium on both coasts, much of Alaska, and parts of the Gulf. Sen. Chuck Schumer seems to think the solution is cajoling the Saudis into producing more oil. Other lawmakers think that halting U.S. exports of refined oil would somehow decrease the world price of unrefined crude oil, and therefore reduce U.S. prices. Luckily, other options exist in Congress, (see, for example, this bill and this bill) and have earned support from my organization.
The Energy Information Administration chalks up 12 percent of fuel costs to federal, state, and local taxes, including excises, fees, and in some areas sales taxes. With prices reaching $3.71, these taxes now account for about 44.5 cents per gallon, or $8.90 when filling up a 20-gallon tank. But this conservative methodology does not account for "embedded" taxes on exploration, refining, and retailing activities that figure into the companies' overhead and affect consumers, workers, and shareholders in various ways. While many of these levies hit businesses throughout our economy, oil and gas firms are often targeted for punitive treatment. Look no further than the president's budget, which seeks to take away widely available tax provisions only for selected oil and gas companies.
Distribution and marketing account for 6 percent of fuel costs. Federal officials can reduce this burden by encouraging private-sector-driven projects that cut down the costs for transporting the nation's fuel. But so far, progress on initiatives like the Keystone XL pipeline has been painfully slow.
[Read the U.S. News debate on fracking.]
Last, refining represents 6 percent of the price of gasoline. Congress can ease this cost by reviewing tax and regulatory policies that stand in the way of improved refinery capacity. Instead, President Obama and his congressional allies have repeatedly called for tax increases on oil and gas companies (see above), while the Environmental Protection Agency has actively worked to shut down existing refineries.
In a speech last week, President Obama remarked, "We know there's no silver bullet that will bring down gas prices or reduce our dependence on foreign oil overnight." This throwaway line has taken many forms in the past, and has conveniently served as a self-fulfilling prophecy. What if, instead, our current leaders or their predecessors had acted to relieve fuel-price pressures a few (or several) years ago? How much of today's suffering could have been avoided?
A thoughtful energy strategy, guided by free-market competition, common-sense development, and an end to subsidies would be more capable of reducing or stabilizing prices than many politicians would care to admit. But here in Washington, sound strategy all too often gives way to political tactics.
- Follow the U.S. News On Energy blog on Twitter.
- See a collection of political cartoons on the economy.
- Check out U.S. News Weekly: an insider's guide to politics and policy
Reader Comments Read all comments (2)
junior of DC 4:53PM February 29, 2012
Clifton W. of PA 12:38PM February 29, 2012