Sky-High Gas: Who's To Blame?

June 11, 2008— -- Motorists looking for some relief at the pump aren't going to get it anytime soon.The government now predicts that gas prices will hover at nearly $4 a gallon for the rest of the year.

Guy Caruso, head of the Energy Department's Energy Information Administration, updated Congress today on America's bleak oil and gas outlook.

The government now believes that retail gasoline prices will average $3.78 this year -- that's an astounding 35 percent higher than the $2.81 average American drivers paid last year. Last month, the government thought gas would average $3.36.

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The government's top energy economists also now believe that oil will average $122.15 a barrel for the year. Last years average price was 69 percent lower at $72.32 a barrel and just last month they were betting on an average cost per barrel of $100.61.

But who can we blame for the massive run-up in gas prices?

Some people blame Congress and President Bush for not doing enough to keep oil prices in check. Others place the blame on Saudi Arabia and other members of the Organization of Petroleum Exporting Countries for not producing enough oil.

Still others blame the oil companies that are making record profits and Wall Street speculators betting on higher oil prices. And finally there is a group -- albeit a small one -- that places blame with American drivers and their thirst for gasoline.

So who is to blame? Probably a mix of all of the above.

"There's no person you can blame. It's a myriad of factors that have all conspired to drive the price higher," said Bill O'Grady, chief investment strategist for energy at Wachovia Securities.

Let's start with our elected officials.

The Politicians

Congress decides how much oil companies are taxed, what forms of alternative energy development -- such as solar and wind power -- are subsidized, where oil companies can drill and how fuel efficient our cars need to be.

For years, lawmakers have fought over proposals to expand offshore drilling in the Gulf of Mexico and to allow drilling in the Arctic National Wildlife Refuge in Alaska. Republicans have pushed for such increased exploration, but Democrats killed the latest push, saying it would do little to ease gas prices in the short term and could have dire environmental consequences.

The Democrats came back with their own hodgepodge of ideas, including giving the president the authority to declare an "energy emergency" and sue OPEC nations, prosecute price gougers and assess a "windfall profits tax" on oil companies. Senate Republicans killed that measure Tuesday.

And for years Congress has ignored proposals to increase fuel-efficiency standards, or CAFE standards. The standards just got their first major overall in three decades with the new legislation calling for automakers to boost fleetwide gas mileage to 35 miles per gallon by 2020.

O'Grady said Americans have cut back on driving and are now looking to buy smaller cars, but that Congress denies its share of the problem.

"Although the public has clearly moved to the acceptance stage, Congress has not. Congress is still stuck at this anger stage so they want to blame speculators," he said. "They are pandering. They want people to feel good about themselves. They want somebody to blame."

American lawmakers should look to their counterparts in Europe, O'Grady said. There, gasoline is heavily taxed to keep consumption down. Consumers have adopted smaller cars and extensive mass transit systems, and conutries have developed extensive mass transit systems.

"The reality is that we should be taxing this stuff more," he said. "Using price levels and intelligent tax systems to affect change is very effective but usually not a lot of fun. Every politician knows that if you do something the public doesn't like they will find somebody else."

Big Campaign Contributions

There is also a lot of money at stake for the politicians.

The oil and gas industry is one of the top donors to political campaigns year after year after year.

In 2004, the industry donated more than $25 million to politicians around the country, according to the Center for Responsive Politics.

And the bulk of that money -- more than $20 million -- went to Republicans. Bush's re-election campaign alone received $2.7 million of that money. (Bush also got nearly $2 million from the oil and gas industry in 2000.)

This year is also turning out to be a lucrative one for politicians, with more than $14 million from the industry reported to the Federal Election Commission by the end of April, according to the Center for Responsive Politics.

And again, that money is flowing mostly to Republicans -- this time about 73 percent of contributions.

But there is more money at stake. The oil and gas companies spend millions of additional dollars, hiring a mass of lobbyists to push legislation their way. In the last decade, the Center for Responsive Politics has tracked more than $640 million spent by oil and gas companies on lobbying.

The oil companies did have plenty of money to throw around.

ExxonMobil recently reported $10.9 billion in earnings for the first three months of this year. That's up 17 percent from the year before. And ExxonMobil wasn't alone. BP's earnings are up 60 percent; Shell, 25 percent; ConocoPhillips, 17 percent; and Chevron profits rose 10 percent.

The companies say those profits are needed to reinvest in their expensive equipment and to find new oil reserves. Without such investments the companies say they might not be able to provide a steady stream of oil in the future.

America's Addiction to Driving

Not all the blame rests with politicians.

For decades, Americans have been addicted to their cars, driving more than necessary, thanks to cheap gas.

Instead of living close to our workplaces, we have chosen to live in large suburban developments or in faraway rural areas that require a car for even the simplest of errands.

Americans spend more than 100 hours commuting to work each year, according to the U.S. Census Bureau. That's more time than most Americans spend on vacation. In 2003, the average daily commute was more than 24 minutes.

And most of that time is spent alone in a car.

America has less than 5 percent of the world's population but we consume about 25 percent of the world's energy resources. China and India are rapidly increasing their share of the energy market -- which is helping to drive up prices -- but America still dominates.

"We have to convince the population that they do not have a God-given right to cheap, plentiful oil," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

Americans have also been buying large gas-guzzling cars for decades, most recently big SUVs.

Consider this: The Ford F-Series pickup truck has been the best-selling vehicle in the United States for 26 years. (There were occasional months when it was beaten in sales -- but always by another truck, usually the Chevrolet Silverado.)

Now, only after gas has topped $4 a gallon are some drivers changing their habits. In May, sales of the F-Series fell more than 30 percent, and the fuel-efficient Honda Civic took the top spot, followed by the Toyota Corolla, Toyota Camry and the Honda Accord.

Some experts place blame with the auto industry for not manufacturing more fuel-efficient cars. But others point out that the automakers were just responding to customer demand.

"They make fuel-efficient cars all the time. Nobody buys them," O'Grady said.

The Oil Cartel

Many people are also turning toward the Middle East, looking at big oil-producing countries like Saudi Arabia.

Saudi Arabia and the other OPEC members have blamed other factors for the rise in oil prices.

Saudi Arabia last month announced a 300,000 barrel-a-day increase in oil production, but the news had little impact on oil markets. The extra oil wasn't much, considering that the country pumps 9.45 million barrels out of the ground each day. (One barrel holds 42 gallons of oil.)

If the OPEC nations decided to increase production by, say, 1 million barrels, then there might be some relief in the markets.

While such an increase might lead to lower prices at the pump now, it is not a long-term solution. There is only so much oil in the ground, and if more is pumped today there's less for the future. With explosive growth in China, India and elsewhere it is very likely that all the extra oil would quickly be consumed and prices would skyrocket again.

The Speculators

Oil prices are high because of worldwide demand. But part of the price spike comes from market moves. The first -- and easiest to understand -- is that oil is priced in U.S. dollars. So when the value of the dollar falls, as it has in the past year, the price of oil goes up for Americans.

But the market is much more complex than that. Many investors -- some call them speculators -- are pouring money into oil when they had previously ignored it.

Basically, many investors are spooked by the subprime housing market and other problems with the financial sectors, and have fled from the stock market. Instead of investing in stocks or bonds, these investors have chosen to place their money in oil, driving up the price.

O'Grady at Wachovia Securities said that part of the problem also has to do with the Federal Reserve setting interest rates so low. He said that when inflation is 4 percent but investors are only getting 1 percent for their cash in the bank, they look for other investment options. Normally, real estate would be one of those options. But with that market collapsed investors are turning toward commodities such as gold, corn and oil.

Plus, every time there is some geopolitical fear, prices rise. The latest such tension comes as Israel and Iran, the world's fourth largest oil exporter, are having a war of words. Israel has threatened to attack Iran's nuclear program, and Iran has threatened a strong reprisal.

So the price of oil has a lot to do with these fears and speculation and a lot has to do with demand.

"It's just hard to tell what the right price should be," O'Grady said.