Thursday, April 10, 2008

Increased demand increases price of gas

(I wrote this column in May 2007, but it still holds true today, so I thought I'd post it here.)

A boycott of gas the other day reminded me of the time when I was a kid and decided to boycott air in my own attempt to gain the sympathy of my mom. She never even batted an eyelash.

In the same way, gas companies and gas stations never even batted an eyelash when sales were down that one day. In fact, they probably enjoyed the slow time. Like my mom knew I’d eventually be forced to take in a breath, the gas sellers know people will need to fill up sooner or later too.

People were complaining at my work about the price of gas being $3.50, and it not being fair that politicians and gas companies were setting the price of gas so high nobody can afford it. I listened to this conversation for several minutes, holding my tongue the whole time wondering if the price of gas was really effecting the way Americans live.

True, 30% of Americans admit that they have gone shopping less often since gas reached current levels. Then again, on the other hand, “if people can’t afford gas, then why are gas company profits hitting record highs?”

Yes, prices are record highs (not really if you adjust for inflation. Adjusted for inflation, they gas prices were much higher under the Carter Administration in the late 1970s.), but 70% of people admit gas prices have not effected the way they live.

What my good friends failed to recognize is that there isn’t one person sitting in a chair someplace with the sole job of increasing and decreasing the price of gas. The price of gas is set mainly by the free market.

You have to think of it this way. There is only so much gas to go around at one time, which means supply of gas will remain at a relative constant. The only thing that changes is the number of gallons of gas sold per day, and this is called demand. Therefore, as far as gas is concerned, demand for gas determines the price of gas.

Thus, when demand for gas increases, the price goes up. The opposite holds true too, so that when demand for gas decreases, the price will go down. This is mainly true, mind you, when the supply stays the same. If there was a way to increase supply, such as with more refineries, then an increase in demand might not effect the price.

Anyway, with supply at a constant, when demand increases, so to does the price.

This is why the price of gas in Alpena, Michigan is usually lower than the price of gas in Detroit, because demand for gas is greater in Detroit due to the greater population. Likewise, some states and some cities have gas taxes, and that too can effect the price you pay for gas. In most cases, state and local taxes raise the price of gas 20-30%.

There are a few things that could be done to decrease the price of gas. Other than cutting taxes, the most obvious would be to become more self sufficient, and produce more of our own oil. Congressmen in Alaska want the U.S. to dig for oil in their Tundra, but a other Congressmen decided this would not be a good idea.

“We don’t want to ruin all that nice natural reserve. We don‘t want to hurt the animals there.”

The truth is, the land set aside by the government for oil drilling is a swampy, treeless flatland infested with mosquitoes during the short 70 day warm season and frozen over the rest of the year with temperatures down to 70 below zero, as the Alaskan Congressmen have attested to. Plus, the land needed for oil drilling consists of a mere 0.00007% of the 19 million-acre wilderness, which is about a fifth the size of a city Airport.

"Alaskans understand better than most Americans the necessity of maintaining the health of our land. At the same time, we do not fear extracting the resources found within it," wrote Alaskan Governor Tony Kowles in a letter to members of the U.S. Senate in March, 2001

But, for whatever reason, other congressmen think they know better, and we have to suffer at the pump as a result.

The fear that wildlife will be effected is based on mere speculation, as Governor Frank Keating of Oklahoma states: "Opponents warned that poking new holes in the tundra would ‘devastate’ this ‘cathedral of nature.’ In Oklahoma, which has been a top-five oil producing state for more than 80 years, most people are puzzled by these apocalyptic predictions, as they live in harmony with more than 100,000 oil and gas wells."

According to Charli Coon “Supply = Security,” The Heritage Foundation (, May 7, 2003, “When the pipeline opened from Prudhoe Bay on the north slope to Valdez in the south, alarmists predicted a quick end for the porcupine caribou herds that inhabit the area. In fact, their number has tripled in the 25 years the pipeline has operated.”

He also adds that ANWRs “1,500 inhabitants—who have seen their neighbors to the near north become economically comfortable from a quarter-century of safe, clean oil exploration at the Prudhoe Bay, Sourdough and Kuparuk oil fields—support drilling by 4 to 1.”

Even Bill Clinton’s Department of Energy reported that oil drilling in ANWR would be environmentally efficient. Since drilling is mostly during frozen seasons, roads are made of ice, and simply melt away in the spring.

And, while 75% of Alaskans favor drilling in ANWR, your congressmen are preventing it.

Despite what people might think, most of the money made from the sale of gas goes to local or state governments via taxes. So, if you really want the price of gas to go down, talk to your Congressmen.

One of the easiest things you as an individual can do is conserve energy. I was informed by an email that you can do this by many means, which include: riding your bike to work, taking the subway, car pooling or simply walking.

Heavier objects use more gas, so the less gas you have in your tank the less gas you will be using. So, it’s better to have only half a tank than a full one.

That’s a good fact, considering many good folks can’t afford to fill their tanks more than once a week, especially when it’s $50 or $60 bucks a stop. So they end up letting it go all the way to “E” hoping the price will go down before the inevitable fill-up needs to occur.

And then, hoping that gas will go back down tomorrow, I usually limit myself to $25 worth, which gives me about half a tank -- if that.

If new oil refineries were built in the U.S., supply would indeed go up. However, there has not been one new refinery built since 1976, and in 2007 oil refineries are at full capacity. Based on fear that oil drilling will pollute land and hurt wildlife, these environmentalists have lobbied Congressmen to set the criteria for building new refineries so high, and therefore no one wants to pay for a new one.

We suffer at the pump as a result.

The truth is, the technology for oil drilling has come a long way in the past 20 years so that the land needed is extremely small, and the risk of environmental messes a meager fraction of what they were even yesterday. However, environmentalist groups like the EPA and people who support them refuse to acknowledge that fact.

Of course environmentalist groups wouldn’t exist if they didn’t create fear, and the fear that oil drilling seems to work wonders for them. It’s this kind of ignorance that brings in millions, if not billions, of dollars yearly to their cause.

Right now 57% of our oil is imported from foreign nations. That oil is subject to price manipulation by OPEC, threats from dictator run nations like Iran and Syria, sabotage of pipelines by terrorist thugs in an attempt to drive up prices and negatively effect prices in free nations they abhor.

Likewise, as is probably the case right now, every time there is a broken pipe, a power outage, an act of nature, or any other problem at one of our old refineries, the price of gas increases.

Booming economies in China and India, where people are demanding new cars and need gas to fill these cars, have caused world demand for gas to top record breaking levels. Since the United States is not self sufficient, this increase in world demand for oil directly effects the price of oil that you and I see at the pumps.

And every time something scary happens in the Middle East, and people rush to the pumps in fear prices MIGHT go up the next day, the price will go up. The price may or may not go up if people did not rush to the pumps, but the simple fact that they do increases demand.

The same thing happens as a result of a boycott. When people rush to the pumps so they can have a full tank prior to the boycott, demand increases and the price increases.

Thus, if we had more oil reserves, and if we drill for oil on our own land using our own recourse's, demand for foreign oil would greatly diminish, and the U.S. wouldn’t have to be concerned about what thugs and dictators and OPEC do to effect the price of oil. And we also wouldn’t have to be concerned about an increasing world demand for oil, as we’ve seen since more countries are accepting capitalism, and, as a result, have benefited by booming economies. And gas prices won’t go up every time one of our refineries has to close its doors for a day.

It’s obvious what needs to be done: the U.S. needs to provide incentives for building new refineries, and we need to take Alaskans up on their offer to drill in the Tundra. There isn’t really much the federal government can do regarding state and local gas taxes, but you can get those taxes lowered by your vote and by calling your local congressmen and women today.

There is another option, and that is to purchase fuel efficient cars or hybrids. Hybrids are not an option for people like me who have big families to lug around, and the price is often way to high for most middle class people.

However, I’m very confident the high price for gas will tick-off one of our great inventors enough that he will work overtime trying to get his next great gas-less invention on the streets. Wouldn’t it be cool if we all had electric cars that we simply plugged into an electric outlet in our garages, or used ethanol, a hybrid, or dumped our garbage into a fuel converter like in the Back to the Future Movies.

Bill O’Reilly of “The O’Reilly Factor” on Fox News agrees with me that environmentalist groups might be one of the reasons no new refineries have been built, at least according to his latest column. He writes, “There is some truth to that, but the biggest problem in building more refineries is money. Big oil doesn’t want to spend billions on a new facility because they are making record profits now and alternative energies may be coming.

Likewise, the New York Times (Jad Mouwad, "Oil Industry Says biofuel Push May Hurt at the Pump," May 24, 2007): "And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.

"They point to a surprising culprit: uncertainty created by the government’s push to increase the supply of biofuels like ethanol in coming years."

Hopefully, those electric cars will be arriving soon. Where’s Henry Ford when you need him?

In 1900, environmentalist groups said the world will run out of oil by the 1920s. So, you can expect, when electric vehicles become a mainstay in every American garage, these groups will start proclaiming that if people don’t start conserving, we will run out of electricity.

(Then again, these cars will probably too expensive for ordinary folks form many years after they are invented anyway.)

And when we try to build new electric facilities to increase supply, they will tell you of all the environmental hazards of doing this. And you can expect millions of Americans will literally buy into their fear tactics, just like they are today.

That’s simply the way the world works.

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