The real reasons for high gas prices

Thomas Pyle President, Institute for Energy Research
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The high cost of gasoline has become a political football in this fully ramped-up campaign season, yet with the price of gas expected to top $4.00 per gallon nationally in the coming months, American consumers deserve facts about gas prices and not more political rhetoric. Regrettably, both sides of the political aisle are pointing fingers even though most people don’t really understand the various factors that influence gas prices.

One major contributor to rising oil and gasoline prices is geopolitical turmoil. Legitimate concerns about the future supply of Iranian oil amid continued uncertainty about Iran’s nuclear ambitions are doubtlessly boosting oil prices. Iran has even threatened to close the Strait of Hormuz in the Mediterranean Sea, a vital gateway for shipping that carries more than one-third of the world’s seaborne-traded oil. Anxiety regarding Iran is heavily impacting the speculation and trading of oil on global markets.

Increasing demand for oil in developing countries like China and India, which are rapidly industrializing, is also partly responsible for the rising prices.

Another factor affecting pump prices — one that many Americans don’t appreciate — is the declining value of the American dollar and our nation’s loose monetary policy. Oil is more than a commodity; it’s an international currency that is traded on the global market in American dollars. As the value of the dollar falls, the price of a barrel of crude oil rises accordingly. If Congress were to begin taking steps to shore up our own economy by enacting policies that strengthen the American dollar, we could quickly see lower oil prices.

We often hear lawmakers in Washington say there are no available short-term steps to lower oil and gasoline prices. That is simply not true.

Congress should rework EPA regulations mandating the use of ethanol in gasoline that are unnecessarily adding to the cost of every gallon of gasoline produced in America. These regulations, known as the Renewable Fuel Standard (RFS) of 2007, require refiners to blend increasing amounts of biofuels, including one type that doesn’t even exist yet, in gasoline.

Currently, most cars and light trucks are built to run on gasoline with 10 percent ethanol (E10). However, the EPA recently approved gasoline blends containing 15 percent ethanol (E15) for use in vehicle models dated 2001 and later.

In a recent letter to Congressman James Sensenbrenner (R-WI), a coalition of auto manufacturers cautioned that E15 mandates could damage vehicle engines and void consumer warranties for cars and trucks that are designed to use a maximum of E10. In addition, higher rates of ethanol in fuel decrease fuel economy and make fuel more expensive for everyone.

To make matters worse, last year the EPA charged refiners about $6.8 million in penalties for not using enough cellulosic biofuel in gasoline. But the problem is cellulosic biofuel doesn’t exist on the commercial market. That’s right. The EPA is penalizing refiners for failing to blend a product that isn’t available. These costs — like all other hidden taxes — get passed along to consumers in the price they pay at the pump.

Finally, the EPA is presently considering new gasoline mandates known as Tier 3 standards that, according to independent analysis, could result in a 12- to-25-cent-per-gallon increase in the cost of manufacturing gasoline.

The reality is that we can take simple steps to reduce the price of oil and natural gas here in America. We could produce more oil and natural gas domestically. We could get more oil from Canada by, for example, approving the Keystone XL pipeline. And we could cut down on harmful, needless government regulations. Taking these simple steps is our best shot at creating a secure, stable energy supply and initiating a much-needed energy manufacturing renaissance in America.

Thomas J. Pyle is the president of the Institute for Energy Research.