YOU DECIDE: Can we do anything about gas prices?

Date posted: April 27, 2012

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

There are few parts to our economy that get people riled up more than rising gas prices, and for good reason. Most of us buy gas at least weekly — spending on gas takes a chunk from our budget — and often we feel helpless in doing anything about what we spend at the pump.

Economists who track the economy also get worried when our pump pain tightens. Much of the extra price we pay flows out of the country. Higher gas prices, therefore, leave consumers with less disposable income to spend elsewhere, and this slows the overall economy. As a rule of thumb, every 10-cent jump in the gas price slows our overall economic growth rate by 0.2 percentage points. If gas prices hit $5 a gallon and stayed there, we would likely slide into another recession.

So is there anything we can do — as individuals or as a country — about gas prices? Below I discuss some of the common suggestions, together with their pros and cons, and then let you decide what, if anything, makes sense.

Boycott gas stations and buy less gas. The retail outlet where we purchase gas is our contact point with the system, so it makes sense we might take out our anger on those sellers. But they aren’t the villain. The retailer’s profit is only about 1 to 2 cents per gallon, and often less. And in terms of buying less gas, we’re been doing that. Americans bought 38 billion fewer gallons of gas in 2011 than in 2010. But our frugality has been swamped by the big jumps in gas buying in rapidly growing foreign countries.

Rein in the speculators. By speculating on oil prices (of course, gas prices are ultimately driven by oil prices), an investor is buying oil contracts today with the expectation of selling those contracts in the future for a higher price. The concern is that the widespread buying of oil contracts today will cause prices to rise and, therefore, can be an independent factor behind jumps in gas prices.

Economists who study oil markets have found some evidence supporting this claim. But before you say, “A-ha, we have our villain,” these same economists say speculation is not the only or even the major factor behind the upward push in pump prices. One study estimated speculation accounted for about 15 percent of the rise in oil prices between 2004 and 2008. Plain old changes in demand (use of oil) and supply (production of oil) were calculated as more important.

Eliminate or reduce the profits of oil companies. Historically, Americans have been suspicious of big companies, and certainly international oil companies are in the category of big. Their profits also tend to rise when oil and gas prices jump. So couldn’t we get relief at the pump by limiting the size of these profits?

The answer is certainly “yes,” if oil companies made a smaller profit or no profit at all, we’d pay less for gas. But how much less? Here’s the sobering reality check. Government numbers show oil companies make pennies of profit per gallon, generally under 5 cents. Their profits are big in total dollars because billions of gallons of gas are sold. Countries pumping the oil get the big bucks.

Increase supply. Simple economics says if supply increases faster than demand, price will drop. So one simple way around high gas prices is to boost the supply of oil.

In fact, we have been increasing oil supplies — even here in the U.S. — and some experts think we can continue to do it. Indeed, one forecast suggests U.S. oil production could jump by 4 million barrels a day — a gain of 66 percent — in the next two decades.

But here’s the rub. Over that same time period, the world’s use of oil is projected to increase by 31 million barrels per day. So unless there’s a comparable worldwide jump in supplies, we may not be able to pump our way to lower oil and gas prices.

Lower or eliminate state gas taxes. The combined federal and North Carolina gas tax is near 57 cents per gallon. Obviously, lowering or eliminating one or both taxes would mean a noticeable reduction in the pump price. But there’s a catch; the majority of these funds go for road construction and maintenance. The cost of a lower gas tax might be bumpier and more congested roads.

Tap the Strategic Oil Reserve (SOR). The SOR currently holds 700 million barrels of oil, equivalent to a month of our domestic usage. A release was made last year, and pump prices did fall for a couple of weeks. But what if there’s a shooting conflict in the Middle East, and oil supplies there can’t get to market? Would we want to save the SOR for that possibility?

I’m tapped out of ideas for now. Unfortunately, I’ve not presented you with a quick, short-run solution to high gas prices. But the long-run is another matter, with the ingenuity of the American producer and consumer in changing markets. They may be our best bet, but you decide!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective

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2 Comments to YOU DECIDE: Can we do anything about gas prices?

  1. by Ronald Lamothe

    On April 28, 2012 at 4:20 pm

    There is an answer to high gas price and American money going to foreign countries.
    NATURAL GAS!!!!
    If the government would subsidize or give tax breaks to install natural gas pumping stations, and then get the auto makers to produce vehicle to run on natural gas (which is cheaper and cleaner and plentiful in the USA) then we would reduce our need of foreign oil.

  2. by Alva Lamothe

    On April 28, 2012 at 5:48 pm

    NATURAL GAS is the answer to high gas prices.
    If the US would switch to natural gas to fuel their vehicles, it would lower demand for oil resulting in a lowering of gasoline prices.
    Natural gas is cheaper, cleaner and the US has a 70 – 100 year supply.
    The main problem is that there are very few natural gas pumping station and until there are more, the auto industry won’t produce natural gas vehicles.
    This is where the government can help by providing tax breaks or subsidizing natural gas pumping stations

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