Why 'Gas
Out' Won't Work
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
It might
draw some media attention. But it won't change the price you pay at the pump
by one penny.
Don't know about
you, but I'm sure tired of rising gas prices. And based on my mail many of you
feel the same way. Lately I've received dozens of copies of an email
encouraging people to support a 'Gas Out' from April
7 to 9th. Everyone would refuse to buy gas those days. The email says that
last year's effort was successful in sending a message to those that produce
gasoline and we need to do it again.
You're not going to like what follows. In fact,
some of you will probably think that I work for the oil companies. I don't.
But I can pretty much tell you that "Gas Out 2000" won't work. It
might draw some media attention. But it won't change the price you pay at the
pump by one penny.
And if you'll consider the facts you'll understand why.
According to the American Petroleum Institute
Americans consume about 8.4 million barrels of gasoline and 3.5 million
barrels of heating oil/diesel fuel daily. That's about 13% more than we used
10 years ago. We
import a little over half of the oil that we consume. So use is up and we're
still very dependent on the OPEC.
If we compare historical gas prices we'll learn
something interesting. Retail prices peaked at $1.35 per gallon in 1981. In
1998 they were as low as $1.22 per gallon before jumping all the way to $1.44
in February, 2000. And the trend continues higher.
But, that really doesn't tell us what's going
on. A number of different costs go into that gallon of gasoline. The retail
price includes the cost of crude oil. The oil companies incur costs to refine
and distribute it. They also keep some profit. Finally our government adds
taxes.
Let's begin by considering taxes for a moment.
In 1981 the average gallon of gasoline carried taxes of 14 1/2 cents. By 1998
they had crept up to an average of 41 cents per gallon. We were paying less at
the pump, but
that hid the fact that taxes had nearly tripled.
From 1981 to 1998 the price to get a gallon of
oil to the pumps dropped from $1.21 per gallon to $.71. Unfortunately for
consumers that was the low point. By February, 2000 it had gone up to $1.03
per gallon.
So there are two increased costs that we're
seeing today. The extra 26 cents per gallon in taxes and recently the 30+ cent
increase in the cost of the gas itself. Which leads us to the next question.
Why has the cost of
gasoline increased so dramatically?
Two things must happen for there to be gas at
your local station. First, someone must get a barrel of oil out of the
ground. That's the cost of crude (unrefined) oil. Then someone must refine the
crude into gasoline, distribute it to gas stations and make a profit on it.
Since early 1999 crude oil prices have jumped
from $11 to $30 per barrel. OPEC had suffered through declining prices for a
decade. Last spring they decided to produce less.
The strategy comes from Economics 101.
If something is rare it's more valuable. OPEC has the ability to make crude
oil rare by reducing production. They'll sell fewer barrels, but get a higher
price per barrel.
Compare the low 1998 prices to now. In 1998
crude oil to make a gallon of gas cost 30 cents. Today it costs 68 cents. The
shortage that they've created has added 38 cents to the cost per gallon. No
question, we've discovered a bad guy!
But what about the oil companies and gas
stations? Are they getting rich, too? As it turns out, the gas companies are
actually getting less now than they did in 1998. Back then they were getting
41 cents per gallon. Now they're only getting 35 cents. So clearly the blame
isn't with Chevron, Hess or Joe who owns the corner station.
Some of you probably think that we just
demonstrated why the 'Gas Out' is so important. So let's suppose for a moment
that the event is wildly popular. Everyone joins in.
So how much effect will the 'gas out' have on
OPEC and those who pull the oil out of the ground? Probably not much. Here's
why. Whether you buy gas on April 8th or not doesn't affect them. The gas you
buy today was
produced months ago. So buying a day or two later has no effect on them. A two
day disruption is no big deal. It happens every time there's a snow storm.
But, I can still hear some of you saying that we need
to let them know that we're mad and demand changes. Know what? You can yell
and 'gas out' all you want. OPEC is already measuring if you're really
serious. They can tell by monitoring two things. First, are we buying bigger
or smaller cars. Second, is the demand for gasoline going up or down.
OPEC has already started to talk about
increasing production. Kuwait's oil minister, Sheik Saud Al Sabah, was
receptive to a recommendation from Saudi Arabia, Venezuela and Mexico to
increase production. Why would they produce more now?
It's simple. They want to make as much money as
possible. If Americans shift to smaller cars like we did in the 70's then
demand will go down for years to come. So they want to raise prices to just
below the point that you'll use less.
Another reason that the 'Gas Out' won't work is
that on March 27th OPEC will hold a meeting to determine how much oil to
produce once the current agreement expires in April. That's weeks before the
'Gas Out'.
One place that the 'Gas Out' could help is in
triggering the President to release some of the strategic oil reserve.
According to the Department of Energy 565 million barrels of oil are being
held for an 'energy emergency'. In the past reserves were tapped during the
Gulf War. If the President 'feels your pain' he has the ability to
release some of the reserves.
So if a 'gas out' won't help, what can you do?
One very practical thing. Use less gas. Carpool, take public transportation,
combine trips or get your car tuned up. Anything you can do to save gas will
put more money
in your pocket. And that's the one 'statement' that oil producers will notice.
More importantly, you'll notice it in your wallet, too.
__________
Gary Foreman is a former Certified Financial Planner who currently edits The
Dollar Stretcher website <www.stretcher.com>
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