Wednesday, February 29, 2012

How I Learned to Stop Worrying and Love Newt Gingrich

Newt Gingrich recently said that if he became president that gasoline at the pump would cost $2.50 per gallon. An empty phrase that I didn't think was going to show up in this election year. This phrase was that we can lower gas prices. 

To be fair, this phrase was uttered when George W. Bush was president.  In fact, it was the calling card of a lot of Democrats during the election year of 2008.  Democrats did place a lot of blame on the president for having what we thought were high gas prices.  Then the recession happened and we forgot all about high gas prices.

Well, sort of.  I mean, I forgot about them.  But Michele Bachmann did not.  She said,"The day that President Obama took office, gasoline was $1.79 a gallon." Which is entirely true.  But you know, 70% of the price of gasoline is based off of the price of crude oil (see the linked article in previous statement). What about the other 30%?  Or a better question is, how much impact does the president actually have in determining gas prices?

President Obama did put a moratorium on deepwater drilling, which in turn have been blamed for rising gasoline prices.  But this moratorium did not affect gas prices like some noted Republicans have said.  In fact, one former  Mobil Oil Executive said that the impact of the moratorium on gas prices was "nothing. Zero."  (Click)  The deepwater drilling moratorium did not affect any of the wells that were already in place but did place a stop on any new ones being placed.  How much of the production for the United States is really going to be changed by this?  Let's find out. In 2010, there was a record number of oil being produced from these deepwater drills.  It was producing 1.64 million barrels per day despite the spill in gulf and the moratorium.  In 2011, the Energy Information Administration projected that because of the moratorium the production would fall by 240,000 barrels per day.  But before the moratorium, they were projecting that we were already going to be behind by 130,000 barrels.  So the difference is really 110,000 barrels per day.  This still seems like a lot, however, the United States consumes nearly 19.30 million barrels per day of oil.  What we're talking about losing is "six-tenths of one percent" of the amount of oil consumed.  The former Mobil Executive said that it "might affect gas prices by one or two cents per gallon."  What he blames for the rising gas prices are a series of global events, such as a series of refinery accidents, a labor strike that led to the closing of refineries in France, "operating problems" in Venezuela, Mexico, and other South American countries and unrest in the Middle East.  All of this led to the price being over $100 per barrel.

But what if we're importing more and more oil each year?  Well, that is not the case.  We actually imported more "liquid fuels"  measured as a share of our use of these "liquid fuels" in 2005 and 2006.  The imports were at a 60% share.  They declined to 52% in 2009.  It is expected to decline to 42% by 2035.  Using the 2010 data, FactCheck used the monthly import figures compared to the 2008 figures, to compare how much we were importing per month as compared to 2008.  In 2010, we imported 2.3 million barrels per day from 13 countries in the Middle East.  In 2008, we imported 3 million barrels per day from the same countries.  In 2010, we imported 1.6 million barrels per day from 11 countries in Africa compared to the 1.7 million barrels per day from the same countries.  Overall, the U.S. imported 11.75 million barrels per day in 2010 as compared to the 12.91 million barrels per day in 2008.  An interesting side note: the United States imports more oil from Canada than any other country. 

But Newt Gingrich has said that President Barack Obama has an EPA plan that will raise gasoline prices 25 cents per gallon.  Yes, he has said that.

He's wrong.  It brings me no joy in saying it.  That's a lie.  I just wish he was more honest about what he was talking about because I think he is a genuinely smart person.  Well, to sum up FactCheck's wonderful research, the study is not based on an EPA proposal but rather a proposal from the Alliance of Automobile Manufacturers.  This proposal was to create a National Clean Gasoline.  This proposal is actually tougher than what the EPA is considering for both sulfur and Reid vapor pressure. 

Here's the proposal and the proposed costs:
  • Reducing sulfur level from the current average level of 30 ppm to 10 ppm. Added cost: 1.4 cents per gallon.

  • Reducing average sulfur level to 10 ppm and reducing RVP year-round from 10 to 9 psi. Added cost: 2.5 cents per gallon when the extra costs are allocated to the entire gasoline pool and 5.3 cents per gallon when applied only to summer gasoline.

  • Reducing average sulfur level to 10 ppm and reducing RVP year-round from 10 to 8 psi. Added cost: 3.9 cents per gallon when the extra costs are allocated to the entire gasoline pool and 10.2 cents per gallon when applied only to summer gasoline.

  • If we're looking at summer gasoline it would be 16.9 cents per gallon or 17 cents rounding up.  For regular gasoline, it would be 7.8 cents per gallon or 8 cents rounding up.  But the EPA is not interested in RVP.  If the EPA is only interested in reducing sulfur levels, we're looking at a much lower cost.  One group has estimated that it would be less than one cent per gallon. 

    Former Speaker of the House Newt Gingrich has said that the president can affect gasoline prices, so much so, that he thinks he can lower the prices to $2.50 per gallon.  He has not specified how we was going to do so.  He has said that by opening up more lands to be drilled and allow for less regulation that the prices would automatically be lowered.  This is not the case.  We have numerous experts stating that the gasoline prices are affected by the world markets.  We have them saying that the price of the policies President Obama has placed on gasoline has maybe made gasoline prices raise one or two cents per gallon.  If these policies are overturned we would be looking at $3.98 per gallon (assuming an average of $4.00, which admittedly I'm pulling out of my ass) instead of the $4.00 per gallon.  This is a farcry from the $2.50 Gingrich has pledged. 

    I should note that there is a possibility that the president could control gas prices to such an extent that would lead to a national average of $2.50 per gallon.  In doing so, you would have to throw out any ideas you have about the government could have about not interfering in the free market.  It is possible that the government could subsidize gas prices from oil companies to such an extent that you would have price fixing from the highest level.  This would create an artificially lower price for the gallon of gasoline at the pump.  In order to pull this off, some oil and gas companies would have to be either a) re-imbursed by the government for their loss of profits or b) get out of the oil and gas industry because they're not making the money. If a were to occur, this would be an outrage at the highest level from Republicans who argue that the government should not be "bailing out" companies or even that the government should be interfering in the free market.  If b were to occur, there would still be the sense of outrage about the government interfering in the free market.  There would also be companies getting out of the oil and energy industry.  In doing so, the companies that still are able to hang in there would have one of three scenarios.  In the first scenario, there would be a monopoly in the oil industry similar to that of which Standard Oil had.  It might not grow to an extent of that size because of the price fixing but that would be something that they eventually would want to figure out with the government.  The price fixing would not last in this scenario because the monopolized company would notice that they can make more money otherwise  The second scenario is that the United States would nationalize the oil production.  This simply would not happen in America without people being lynched for being socialists.  The final scenario is that the companies would no longer want to commit as much time, energy, resources, etc. to producing more oil.  By doing this, they are assuring the lowest possible losses.  Without the time, energy, resources, etc. being used in the way it currently is we would have a lower supply of oil than we currently have.  If we have a lower supply but the same demand we have now, the price fixing will not be able to stick in without overturning the basic tenents of capitalism.  A basic rule of free market capitalism is that when there is a low supply but a high demand there is high prices.  I'm not an economist nor do I pretend to be one.  I do not see any way for Newt Gingrich to get the price of gas to $2.50 per gallon without price fixing.  Price fixing would lead to one of these scenarios, all of which are unattractive not only to Newt Gingrich but to what he is trying to accomplish with the American people.

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