September 13, 2000

September 13, 2000 | Commentary on Energy and Environment

Oil Prices: Gassed and Ready To Go....Up

Summer may be behind us, but the high prices American motorists are paying for gasoline show no signs of cooling off. The cost of crude oil has hit its highest level since the Gulf War, and the federal government predicts that home heating oil prices this winter will be 30 percent higher than last year's. If anything, prices will go even higher.

That means, of course, that it's time to haul out everybody's favorite whipping boy: OPEC. President Clinton again went begging for a boost in oil production to cut prices from today's $35 a barrel to no more than $25. And although OPEC has agreed to open their taps a little wider, Energy Secretary Bill Richardson says he doubts the increased production will do anything to stabilize energy prices. The price of crude oil is determined largely by OPEC (not a conspiracy of U.S. oil companies, as the administration alleges), and there is little the United States can do to change it.

But OPEC is not entirely to blame for our costly trips to the pump. Few Americans seem to realize that other factors-from gas taxes to environmental regulations-play a large role in determining gas prices.

It's true the cost of oil makes up the single biggest share-44 percent, to be exact, or 68 cents of the $1.55 per gallon consumers pay in many metropolitan areas. But the rest comes from taxes (27 percent, or 42 cents), distribution (16 percent, or 25 cents) and refinement (13 percent, or 20 cents). Which explains why, according to oil industry analysts, even a sudden spike in oil production won't lower gas prices anytime soon.

Here's how the tax burden breaks down: Federal taxes add 18.4 cents per gallon, state taxes pile on an average of 23 cents, and local taxes add another 2 cents. All total, Americans spend about $53 billion per year in federal and state gas taxes. In Europe, taxes make up as much as 80 percent of the cost of gas, and Europeans now recognize that it is big-spending politicians, not just OPEC, who should be accused of "price-gouging." Today, Europeans are demanding cuts in gas taxes and not just railing against OPEC.

Regulations issued by the Environmental Protection Agency also affect the price of gasoline. Some areas of the country are required to use specially refined gasoline to meet more stringent air pollution requirements. The EPA estimates that the cost of its Phase II reformulated gasoline requirements adds 5 to 8 cents to the price of a gallon of gas. For example, according to the Department of Energy, the average price for a gallon of regular gas in New England states ranges from $1.56 for conventional gasoline to $1.68 for reformulated gasoline.

Burdensome regulations also make it difficult for domestic refineries to meet U.S. demand. No new major oil refinery has been built in the United States in 25 years because the Clean Air Act's requirements are a strong disincentive to build or upgrade facilities. Today, U.S. refineries are operating at almost full capacity, and supply disruptions caused when aging equipment breaks down can significantly affect prices in the short-term.

Other factors are beyond U.S. control. Gas prices also have been driven up by high demand from recovering Asian economies, as well as rising demand in Europe, which has increased competitive bidding for crude oil. Meanwhile, U.S. inventories of crude oil have declined sharply, resulting in lean reserves.

At a time when Washington expects a record-breaking $4.6 trillion surplus of tax payments-or more than $50,000 per working family-over the next 10 years, it's time for policymakers to reconsider cutting the federal gas tax. Suspending the federal tax for just three months would save motorists $4.4 billion.

But there's more at stake in this debate: The economy will suffer if the price of oil remains high. Our analysis shows that high oil prices will cost the average family of four more than $1,300, decrease consumer spending by nearly $80 billion, and cost almost 500,000 jobs. And higher prices, combined with slower economic growth, will reduce federal tax revenues by $12.4 billion over the next three years.

So the next time you're watching the price readout at the local gas pump whirring and blinking like a pinball machine, remember to thank the domestic tax-and-regulate crowd, along with our friends at OPEC. There's plenty of blame for everyone.

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Angela Antonelli is a former director of the Roe Institute for Economic Policy Studies and D. Mark Wilson is a former labor economist at The Heritage Foundation (www.heritage.org), a Washington-based public research institute.

Related Issues: Energy and Environment

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