gas-nozzle-moneyThis post addresses some of the misdirections being propagated by politicians about the rising price of gasoline and points at the actual underlying reasons for these rising prices, clearly illustrating how the global price of crude oil is by far the largest factor in the price of a gallon of gas at the pump and that fuel taxes are a small portion of the overall price. It goes on to make the point that these taxes are also badly needed by a rapidly crumbling national road infrastructure. This is a complex subject; this article provides an important perspective on it.

by William Becker, Senior Policy Expert on energy and climate for Natural Capitalism Solutions in Colorado, and a Senior Associate with the London-based sustainability think tank Third Generation Environmentalism (E3G), where he works on the link between sustainable energy and international security. Becker’s most recent book – The 100 Day Action Plan to Save the Planet — was published by St. Martin’s Griffin in New York. Connect with Bill on Linkedin.

Who should we blame for high gasoline prices? The President? Oil companies? Price gougers? Protestors in the Arab Spring? People who drive Hummers?

gasbreakdown

The answer to that question is one of the first serious issues of the 2011 presidential campaign. (Sorry, Trump. Sorry, Birthers.) It’s an issue that could – and should – become an oil war at home, politically speaking.

The issue is heating up because gas prices affect us all, whether we’re buying fuel, food or consumer goods. Rising gas prices threaten our recovery from the recession and our ability to put Americans back to work.

To anticipate how the price of oil might unfold as a campaign issue, we can look to California in 2006.

One of the initiatives on the ballot was Proposition 87 to establish a new tax on petroleum extracted from the state’s oil fields. The tax would have raised $400 million annually to fund alternative energy programs, with the goal of cutting the state’s oil consumption 25 percent over 10 years.

Proposition 87 contained a clear prohibition against oil companies passing the cost of the tax to consumers by raising fuel prices. The tax would have to come out of profits. In July 2006, polls indicated that 51 percent of California’s voters supported the initiative.

Then in August, opponents launched an aggressive campaign of television ads supported in part by more than $30 million from Chevron. The ads claimed Proposition 87 would result in higher gasoline prices — despite the prohibition in the initiative.

One of the ads featured the president of the California Chamber of Commerce warning that Proposition 87 “would impose a $4 billion tax on oil produced in California, a tax that would lawfully be passed on to the rest of us.”

By October 2006, voter support for Proposition 87 had dropped from 51 percent to 41 percent. The measure was defeated in the November election.

Fast forward to Washington in 2011. Republicans are warning again that a “tax increase” (actually subsidy reform) for oil companies will push gasoline prices higher. Some are blaming President Obama for expensive gasoline.

To his credit, the President stirred the pot on oil subsidies with an April 26 letter to leaders in the House and Senate, urging them to “take immediate action to eliminate unwarranted tax breaks for the oil and gas industry and to use those dollars to invest in clean energy to reduce our dependence on foreign oil”. Obama included the same proposal in his last two budget submissions to Congress.

A day later, 29 Democrats in the House wrote to Speaker John Boehner, proposing an up-or-down vote on oil subsidy reform. Boehner said no. His spokesman explained:

The Speaker wants to increase the supply of American energy to lower gas prices and create millions of American jobs. Raising taxes will increase gas prices and make it harder to create jobs.

In that response, Boehner’s spokesman managed to squeeze three big untruths into two short sentences. They came straight out of the dog-eared playbook the oil industry and its supporters continue using to frighten voters about jobs, taxes and energy prices.

The President has proposed repealing tax breaks for oil companies, not increasing taxes for the rest of the country. Repealing the subsidies will result in higher gasoline prices only if oil companies want to shake down consumers. Four billion dollars a year is chump change in the oil industry. It would shave very little off the industry’s profits.

In the first three months of this year alone, Exxon-Mobil earned nearly $11 billion. Chevron netted more than $6 billion. When Rep. Diane DeGette asked the Energy Information Administration several years ago whether subsidy cuts would cause an increase in gasoline prices, EIA told her that oil revenues were so large that eliminating the industry’s government subsidies need not make a difference in the price at the pump.

The third misstatement in Boehner’s response was that subsidy reform would discourage oil companies from drilling. So long as there’s money to be made, oil companies will drill. Again, $4 billion a year will not make a dent in their profits.

In regard to the blame game, Politico reports this week that:

Americans are paying more than $4 a gallon for gas, ExxonMobil announced a 69 percent boost in earnings, and President Barack Obama is struggling with the fact that he can’t do much about any of it…. Political experts of all stripes say (high gas prices are not) good news for Obama.

Politico cites a new Washington Post – ABC poll in which 60 percent of Independents said they “are concerned enough about gas prices to say that they definitely will not back Obama for reelection.”

But if President Obama can’t do much about it, why should Independents blame him for gasoline prices? The Administration has deployed the few countermeasures in its toolbox to reduce our dependence on oil and the price we pay for it. Among other things, it has instituted aggressive new efficiency standards for vehicles and, despite opposition from House Republicans, would like to increase them even more. The President doesn’t benefit from spikes in the price of oil. On the contrary. We can be certain he will do all he can to keep the recovery on track.

If it’s not “the most powerful leader in the world”, then what really affects oil prices? Former Labor Secretary Robert Reich explains it this way:

It’s a global oil market. Even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.

The Atlantic offers more detail:

Fuel taxes make up 12 percent of the retail price of gasoline. Gas taxes averaged 48.1 cents per gallon as of last January. The federal portion is 18.4 cents per gallon; state taxes averaged 28.6 cents. The federal tax supports the Highway Trust Fund, which is used to build and maintain the interstate highway system, with smaller portions going to mass transit. It’s unlikely these revenues can be reduced without further damaging the nation’s deteriorating transportation infrastructure. The American Society of Civil Engineers estimates we are spending $110 billion too little each year to maintain the transportation system even at current levels. Meantime, the Congressional Budget Office predicts the Highway Trust Fund will run a $7 billion deficit this year and will continue to have deficits through 2020.

gas graphThe biggest factor by far is the price of crude oil. It accounts for 68 percent of what we pay at the pump. It also affects our trade and budget deficits. The Congressional Research Service estimates that when petroleum costs $100 a barrel – a price we’ve already exceeded – oil imports increase the U.S. trade deficit by $100 billion. Every $10 increase in the price of oil costs our military (in other words, taxpayers) $1.2 billion a day.

The balance of gasoline prices – 20 percent – goes for refining, distributing and marketing the fuel.

The biggest factor in price volatility is supply and demand. Also in the mix are increases in U.S. oil consumption during the summer, speculation in oil markets, what’s happening in the Middle East and other countries from which we import petroleum, and the strength of the dollar. The least of the factors – overwhelmed by the others — is domestic oil production.

See our related post, “Unpredictable Oil Prices are Hurting Everyone“, to read more on the damage to the global economy cased by wildly swinging oil prices.

To read more on how the cost of risk is externalized from the many of our energy supplies check out “The Catastrophic Downside Risk of Nuclear, Oil, Gas, and Coal

Gasoline prices are complex, but the politics are simple. Secretary Reich puts it this way:

This gusher (of oil profits) is an embarrassment for an industry seeking to keep its $4 billion annual tax subsidy from the U.S. government, at a time when we’re cutting social programs to reduce the budget deficit. It’s especially embarrassing when Americans are paying through their noses at the pump.

If that doesn’t dissuade Republicans and oil-state Democrats from going to war on this issue, then we should ask them some questions:

How can the members of Congress who condemn federal budget deficits support subsidies the oil industry doesn’t need?
How do oil subsidies, some of which have been in place for generations, square with conservative mantras that the federal government shouldn’t be picking winners or engaging in corporate welfare?
How can members of Congress justify oil subsidies when they’ve been warned repeatedly by experienced senior military experts that, “Dependence on oil undermines America’s national security on multiple fronts”?

Without question, there are issues on which the interests of the oil industry and the public coincide. Politicians may tell us what’s good for Exxon is good for America. But leaders will acknowledge where those interests diverge and, when a choice must be made, will come down on the side of the American people.

If gasoline prices become a huge issue in the 2011 elections, we will see who favors the blame game over solutions and who represents the welfare of oil companies over the welfare of the country. I can see the first bumper sticker now: John Boehner. R-Ohio or R-Oil?

For further reading on the environmental consequences of the current shale gas boom see our post “A High-Risk Energy Boom Sweeps Across North America“.

The subject of carbon lock-in out is explored in our related post “Beyond Petroleum“.

First appeared on Climate Progress


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© 2011, William Becker. All rights reserved. Do not republish.

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Author: William Becker (2 Articles)

  • http://www.cleanenergyactionproject.com John Whitney AIA

    Excellent analysis. Thank you.

  • daniel maris

    V. interesting article. The situation in the UK is quite different. Here taxes of various sorts do account for about 70% of the price of gasoline (petrol)! Of course, that has the avantage of making electric vehicle fuel much cheaper in comparison (only about a quarter of the price of petrol).

    In London we also have congestion charging (a charge to enter the city centre) which limits demand for road space.

    Personally I prefer road pricing, and giving everyone (non-motorists as well as motorists) an allowance which can then be traded. However there are some issues over state surveillance of people’s movements with that.

    • http://greeneconomypost.com Chris de Morsella

      One approach that I also believe has merit is to shift the many fixed costs of car ownership away from being separate and unavoidable aspects of vehicle ownership and build them into the price of fuel at the pump. For example instead of this (at least in the US) lawyer loved system of auto insurance that we currently have; imagine if we could have a basic national automatic no-fault insurance plan that covered all drivers and was completely funded by a tax on every gallon of gas. Drivers who drove the most — and thus on average would need the insurance most would also pay the most at the pump, while those who drove the least would save money. The same for vehicle registration fees and other sundry fixed costs.

      As it currently exists a driver who drives very little still has to pay almost as much of these fixed costs as one who drives much more. It makes sense to me to build these costs into the price of fuel itself in a revenue neutral way… the average driver would see no significant change in their overall annual operating costs (currently: fixed + the recurring cost of fuel AND in under this proposal instead all factored into the price of the fuel itself)

      It would be simple — save the nation enormous wasted time, grief and money on useless litigation (the ambulance chaser lawyers might be unhappy though) — and anyone who desired supplemental private insurance coverage that was in addition to the basic no-fault coverage would be free to elect to purchase it.

      I think that would represent a real win win scenario and would help encourage people to use less gas and to drive less. Fuel efficient cars would look that much more attractive as well.

      • daniel maris

        I wouldn’t want to lose the incentive to good driving represented by car insurance.

        One could envisage a system where you needed a pin number/card to draw fuel (aswell as a means of payment) and if you had been involved in accident claims or had other violations to your name, you had to pay a surcharge on the fuel (i.e. the “bad driving” indicators would generate the surcharge via the pin card). But I doubt any of that would appeal to liberty-loving Americans!

        Such a system would have the advantage of encouraging bad drivers to drive less!