The only bright spot when pulling away from the gas pump these days is that the bruise on my derriere is healing as my wallet gets thinner. We're all being gouged at the gas pump and it isn't pretty.
High gas prices have made for great political fodder as the blame game over who is culpable is in full swing. Newt Gingrich has claimed if he's elected president prices at the pump will drop to $2.50 per gallon. Mitt Romney and Rick Santorum like to blame President Barack Obama for failing to allow additional offshore drilling and failing to build the critical Keystone pipeline that will bring in oil from Canada.
Since Obama has jilted Canadian oil it appears China may have the inside track on Canadian exports. Obama pathetically says it's not his fault; he just shrugs his shoulders and claims that neither he nor Bush before him could control world oil prices.
Well who's right and who's wrong? Gingrich and Romney, while not so out of touch as Obama, have not proposed a reasonable plan to solve the problem. Unfortunately none of the politicians are on the right track and we are all going to be stuck with high prices at the gas pump for some time. Here's why.
The price of gas at the pump is in part determined by the cost of crude oil delivered at the refinery, the cost of refining the crude oil, the cost of distributing the refined product to the retail outlets and the federal and state gas taxes. Of all of these factors that influence the price at the pump, the price of crude oil represents more than 65 percent of the total cost. It therefore stands to reason that reducing the price of crude oil through adding new supply via drilling would reduce the price at the pump.
The only problem with that theory is that refining capacity in the U.S. has been declining for some time. What this means is that the price at the pump is determined more by the available refining capacity than by the cost factors listed above.
In 1982, there were approximately 300 operating refineries in the U.S. Today, that number is closer to 150. Through improvements in efficiency, refining output has slightly increased but all remaining refineries are running at or near capacity. That means that until new refining capacity is added, the price at the pump is more likely to increase than decrease.
More disconcerting than the current high pump prices is the current refinery capacity levels put the economics strongly in favor of the oil companies. When the cost of crude oil increases, the increased costs will be passed on to the consumer.
When the price of crude oil decreases, the price at the pump will not go down but will result in increased refinery profits. This also means that new production resulting from a "drill baby drill" policy will not result in reductions in prices at the pump but rather additional lower cost crude oil being exported to places like China. The Obama administration has done nothing to improve U.S. refining capacity and is not likely to do so. There have been no new refineries built in the U.S. since 1976.
EPA regulations imposed on refineries since 1976 are so severely stringent that it has created nearly prohibitive risks on expected capital returns needed to induce investment in new refining capacity.
Obama and his secretary of energy, Steven Chu, have to be secretly pleased with the situation as it furthers their green energy policies. Believe me, Obama and Chu will not shed a tear over your shelling out nearly 100 bucks every time you fill up.
Gingrich, Romney, and Santorum are getting lots of mileage out of blaming Obama and jumping on the "drill baby drill" bandwagon. While that is good policy for a variety of reasons, there is also a need to be proposing new policies that will economically increase refining capacity. The time frame to get new refining capacity on line, based on current EPA regulations. is between 10 and 15 years. Between now and then the new crude oil obtained by drilling will allow cheaper supplies to be exported and not passed on through lower prices at the pump.
How do you say "drill baby drill" in Chinese?
Dickson is a retired executive in the energy and natural resources sector who lives in Pleasant View.