5 Ways to Deal With Rising Gas Prices

oil tankerYesterday, Exxon Mobil released its quarterly earnings report, which stated that the oil giant had earned more than $10 billion in the first quarter of 2011.  Predictably, this caused Democrats to come out and say that the government should end subsidies of the oil industry (to make us more fiscally responsible, of course), as gasoline prices rise around the country.

First of all, it’s very likely that the rising gasoline prices are a temporary thing.  The same thing happened under President George W. Bush after July 2008, and prices were even higher than they are now.  People that speculate that gasoline prices will continue up, go above $6 per gallon, and remain there forever are most likely wrong.  There are just a few underlying fundamentals that are out of whack right now:

  1. The supply of oil has been disrupted.  Libya, though it only produces 2% of the world’s oil, has caused a kind of fear in the oil market, causing prices to rise.  Even small disruptions in the oil supply can cause wide fluctuations in the price of gasoline at the pump.
  2. U.S. domestic production is down, which also causes the price of gasoline to rise.

So, what can be done about the price of gasoline?  There’s a few things (one that you can do, and a couple others that the U.S. can do):

Buy less gasoline
This may sound silly, but as the price of gasoline goes up, people buy less of it (one of the laws of supply and demand—as prices go up, demand goes down).  As American’s alter their consumption behaviors, the price of gasoline will go down.  President Obama has actually touted this as a way to keep the price of gasoline down (that, and trade in your SUV for a smaller car).

Increase production of oil
The United States can either convince OPEC to produce more, convince other suppliers to produce more, or produce more domestically (open up new exploration, start shale oil production, etc.)  This is where the “drill, drill, drill” mantra of some in the Republican Party comes from.

Increase production of other energy sources
If the United States begins to produce more energy from other sources, the demand for oil products will decrease, which will cause the price to go down.  If we start getting more energy from natural gas, from solar energy, from wind energy, from nuclear energy, then the price of gasoline will go down.

Change regulations on gasoline blends
There are many different “boutique” blends of gas that are required by different cities or states.  In Chicago, for instance, there’s a special blend of gasoline that’s required in the summer, which is more expensive to produce, so gasoline in Chicago costs more than in other areas.  Also, if there’s a shortage of gasoline in one area, it’s against the law to bring in gasoline from another area to relieve demand because of these special gasoline blend laws.  If there were to be a consolidation of laws to create one or two different blends of gasoline that were standard across the country, the price of gasoline would go down.

Decrease taxes on gasoline
Currently, depending on where you live, about 13% of each dollar of gasoline goes to the government.  When you heard this week that Exxon made $10 billion in profits in the first quarter of 2011, it’s likely that the government made more than that from Exxon in the same period.  If the federal, state or local governments were to lower the gasoline taxes, that would lower the price of gasoline.  Some might say that decreasing taxes is a short-term solution, and it is.  Gasoline taxes pay for other government programs, and those have to be paid for somehow.

What is one solution that doesn’t make it to my list?  Increasing taxes on oil companies (or “decreasing tax expenditures,” as President Obama is apt to say).  While this may produce some short-term decrease in gasoline prices, it does not create sustainable price decreases.  A for-profit oil company will increase its prices to keep its profit levels at sustainable/customary levels for its investors.

Question: Do you have any other ideas on how to bring the price of gas down, economic or practical?

Other Resources
Domestic Oil Production” – from How Stuff Works
Product Differentiation in Gasoline Markets” – Erich J. Muehlegger

  • Dan

    6) Take mass transportation! (Ok, so I’m a little bit biased…)

    • Bob

      Absolutely!

  • Chris

    I think ending the subsidies on all oil and energy is a good start. Then we need to eliminate the “interest deduction” that nobody really gets. That’s vital because it’s the big one and it means that our tax code is done via fiat and not via the rule of laws.

  • Jeremy

    I think high gas prices are here to stay and should increase even though the price could fluctuate in the near term for the following reasons.

    1. World demand is increasing even as the United States’ demand decreases. China and India’s thirst for oil is growing. The world is going to need at least 25-35% more oil in the next 30 years which is going to raise prices.
    2. While oil production in Libya has taken a hit, Saudi Arabia has stepped up their exports that same amount. Since we can barely pump out more than we need, we are at the breaking point. Any minor or major political upheavels in the Middle East are going to jack prices. I don’t see political upheaval ending any time soon (Iran, Saudi Arabia, Libya and others).
    3. Speculators are greedy and there is money to be made in oil.

    The U.S. has to decrease its demand more and taxation is one way. Why tax Big Oil and risk them mowing that money around when you can just tax the price at the pump and get that money directly?

    • Bob

      Good points. Well, whether you tax the oil companies or put a tax at the pump, either way the consumer is bearing the brunt of that increase.

      I agree, increasing taxes is a good way to decrease demand. However, why focus on decreasing demand, when we could focus on increasing supply?

  • http://twitter.com/RWNJResponse Puccio d’Aniello

    The  only real way to get prices lower is to use less gas. If the epa relaxed the diesel nox  emission laws so that European  lean diesel cars could be imported with less fuss there are plenty of cars In Europe that can do 60 plus mpg, as the USA uses a great chunk of the worlds oil OPEC would crap their pants. I am not saying we should import more foreign cars small but powerful, economical diesel cars can be made over here if the demand was there.

    If you could go 600 miles on 10 gallons, $5 a gallon does not matter

    why does anybody need a 2.5L gas car to be stuck in traffic?

    • http://bobewoldt.com Robert Ewoldt

      Using less gas is one way to reduce gas prices, but not the only way. Decreasing demand (which is essentially what you’re saying) is one side of the equation. The other way is to increase supply of the commodity. I’m in favor of both ways. I agree with your solution, but it’s not the only way.