May 1, 2008
By Alex Mills
Gasoline and diesel prices rose to record highs for the fifth consecutive week, according to the Energy Information Administration, and our national leaders suggested weak, temporary “fixes” to a problem that has been building steam for 30-plus years.
EIA reported the U.S. average for self-serve, regular was $3.603, which is up $0.214 since April 14. For the third week in a row, the U.S. average diesel price reach a new high, increasing $0.034 to $4.177 which is $1.366 above a year ago.
Why are prices so high and what can be done to bring prices down?
Gasoline and diesel prices have increased because crude oil prices are up. Actually, gasoline prices have risen only 23% on the spot market compared to a 44% increase in crude oil prices during the past year. If gasoline prices rose at the same rate as crude oil prices, the U.S. average would be about $4.25 per gallon, or about $0.60 more.
Gasoline inventories increased earlier this year, indicating that demand was softening somewhat because of rising prices. EIA placed the drop in gasoline demand at 0.8 percent for the first quarter of 2008 compared to the same period in 2007. Also, refiners are experiencing relatively low margins so far this year.
Recently, however, gasoline inventories fell sharply, even though imports remain relatively steady while demand has increased seasonally, EIA said.
Diesel prices, on the other hand, remain close to crude oil. Worldwide diesel demand has kept inventories tight and prices higher than gasoline, according to EIA.
The Political Fix
Hillary Clinton, Barack Obama and John McCain – all candidates for President of the United States – believe that gasoline and diesel prices are too high and they have the solution.
McCain and Clinton advocate a federal gas-tax holiday that would suspend the $0.185 per gallon federal tax on gasoline and $0.244 per gallon federal tax on diesel from Memorial Day until Labor Day. The tax-holiday solution certainly will lower prices, but lower prices will send wrong signals to consumers and consumption probably would increase putting more upward pressure on price.
Clinton wants to pay for the tax holiday by placing a windfall profits tax on oil companies, which would have the impact of a negative on top of a negative. The tax holiday temporarily lowers prices at the pump sending wrong signals to consumers and increasing demand, and the windfall profits tax acts as a deterrent to increasing crude oil and gasoline supplies. So, in effect, instead of increasing supplies and reducing demand that lowers prices, Clinton’s plan does just the opposite and restricts supplies while encouraging consumption.
Obama isn’t sure. As a state senator in Illinois, Obama supported a state-gas-tax repeal, but said the repeal of the federal tax wouldn’t do much.
Long-term solutions are even more puzzling. McCain, Clinton and Obama oppose efforts to increase crude oil and natural gas supplies by opening up federal lands in Alaska and the Rocky Mountains for exploration. They oppose market-based solutions that would decrease demand.
Energy producers and consumers can expect even more pressure on supplies in the future, because the three Presidential candidates don’t have a clue about the real causes and solutions.
