Friday, June 6, 2008

Coping With Record High Fuel Prices

Record fuel prices have Americans, as well as drivers around the world, feeling gas pains at the pump. High oil prices also drive up the cost of many other items due to production and delivery costs. High gas prices are certain to be a major issue in this year's elections.

Currently, the high price of oil reflects increasing demand around the world, particularly from developing countries such as India and China, as well as constraints on supply. Supply is limited by the high cost of exploration for new oil fields and bureaucratic limitations on opening new refineries.

While the high cost of gasoline is a problem for many, there are a few groups who benefit from high price of oil. Oil producing countries reap huge profits from expensive oil. Environmental groups seeking to reduce oil consumption have sought to artificially drive the price of oil even higher by increasing gas taxes. Alternative energy companies are an attractive investment when the price of oil is high.

For groups who seek to keep the price of oil high, there are several courses of action. First, they should work to keep demand high by discouraging conservation. Drivers should be encouraged to not to carpool or combine trips. Drivers should also be told not to slow down. Driving over 60 mph dramatically increases fuel consumption, especially in gas guzzling SUVs. The effective cost of gasoline increases by about twenty cents per gallon for each five miles per hour over 60 mph. For example, driving 70 mph means that you may as well pay an extra forty cents per gallon to fill up your tank. Not maintaining cars and keeping tires properly inflated also increases fuel consumption.

Keeping demand high is also accomplished by preventing the adoption of practical alternate sources of energy. Many sources of energy that are wildly popular hold little promise for a market the size of the United States.

Brazil has become almost totally energy independent through the use of ethanol-based fuels and many would like for the US to emulate their model. The problem is that Brazilian ethanol is sugar-based while only corn-based ethanol is widely available in the US. Corn ethanol is not as efficient as sugar ethanol. It actually takes more energy to produce and distribute corn ethanol than the ethanol itself provides. Additionally, it would take an area roughly the size of New England to provide enough ethanol to meet American needs. Finally, diverting corn to ethanol drives up food prices, which means that consumers would simply trade expensive gas for expensive food.

Solar and wind power are trendy sources alternate energy, but neither is ready to supplant oil as the primary engine of the world economy. Both require large capital investments in infrastructure and both are subject to changing weather. In the future, better means of storing large quantities of electricity and cheaper solar collectors and windmills may make solar and wind power more attractive, but presently they are not cost-effective or practical.

To keep gas prices high, consumers should also make certain that the supply of oil does not increase. The most effective way of doing this is by continuing to elect politicians who make it difficult to explore and drill for oil domestically in the United States. Current US policies prevent drilling in much of Alaska, the Gulf of Mexico, and federal lands in the continental US. These areas hold 635 trillion cubic feet of natural gas, enough to supply 60 million homes for 100 years, and 112 billion barrels of oil, enough to supply US needs for about 60 years.

Additionally, Congress and state governments are jointly responsible for high taxes on gasoline. Taxes on gasoline make up about 15% of the cost of a gallon, while oil company profits only account for about 4%. A reduction in gasoline taxes would provide relief at the gas pump for American drivers, and some presidential candidates are calling for a gas tax moratorium. Others are calling for increases in the gas tax, however, arguing that higher prices will decrease demand and spur conservation.

Government red tape also contributes to the high cost of gas. Environmental regulations make it a difficult and expensive proposition to build refineries to convert oil into gasoline. The last US refinery was built in the 1970s, although a few new refineries are under construction.

Environmental regulations also require that refineries manufacture expensive blends of gasoline in certain areas and in the summer to decrease pollution. Changing formulas is expensive and requires the refinery to stop production to make the changes. Making fewer types of gasoline would lower the cost and allow more gasoline to be produced.

Government regulations also slow the construction of nuclear power plants, the most practical form of alternate energy currently available. Advances in nuclear plant design allow nuclear power to be safe, clean and cheap. France currently supplies about 80% of its energy needs through nuclear power. Environmental groups and government regulations make it difficult to build nuclear plants in the US, however.

In short, there are two ways to lower the price of gasoline: by either increasing supply or decreasing demand. As long as people around the world continue to use large quantities of oil and limiting oil exploration and drilling, oil prices will continue to stay high.

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