Why Have Gas Prices Gone through the Roof?

Column by Sam Rasoul

Those big signs at gas stations along every major road in the sixth district shout our dilemma. We can't afford to drive the vehicles we own. In a few short months, gas prices have destroyed the family budget and now threaten our entire economic health.
Over the past few weeks in parades, at fairs, and on doorsteps, I have heard the same concern: the price of gas. We are in a crisis, and families need help today.

What happened? And will things get better or worse? First, let's talk about why the price escalated.

Not everyone agrees on why the prices rose as quickly and as high as they did. I'll take you through the conventional explanation, which offers no quick solution. Then, I'll end with a possible dilemma we can fix with the appropriate legislation and effective energy policy.

One reason for increases in price is simple supply and demand. However, supply and demand didn't hit the wall overnight. There's no doubt demand has escalated. Americans use 25 percent of the oil produced worldwide, and developing countries, especially China and India, are trying to catch up to our pace. Right now the world demands 87 million barrels a day, while oil production lags behind at 85 million barrels a day. OPEC, with two thirds of the world's oil reserves, could produce more but has no incentive to do so while reaping such healthy profits.

The Iraq War has contributed to the crisis also. Oil production was interrupted and has not climbed back to prewar levels. Though the shortfall is only about a quarter million barrels a day, it's easy to see how that shortfall fits the supply and demand picture. To make matters worse, our military operations in Iraq use great quantities of oil, costing us money for which we gain no useful economic output. In fact, our military operations protecting the shipping lanes and oil refineries and other needs of the foreign oil industry we depend on adds more to the demand, pushing prices higher.

Couple those problems with the weak dollar. Our addiction to oil and weak domestic production force us to spend $33 million per hour on foreign oil. We import nearly 70 percent of the oil we consume, sending the money to places where it has no chance of entering our economy. When we send more dollars out of the US, we weaken the dollar and gas prices go up again. Then we must send even more money out --- a cycle that hits us weekly at the gas pump and the grocery store and every other sector of our economy.

Okay, all that makes sense but doesn't answer why prices rose so fast. In 2000, at the request of Enron and other energy companies, Congress exempted energy markets from government regulation. A 2006 Senate report warned speculation uninhibited by regulation would send prices sky-high, but our representatives paid no attention. With no oversight, energy traders have gone wild with market manipulation and excessive speculation. Investors looking for good returns and a hedge against the falling dollar have found an unregulated energy market provides them the perfect opportunity. Their opportunity may account for as much of 60 percent of today's oil prices, according to several analysts.

I'll address possible solutions to these problems in my next article. If speculation is indeed the main driver of high prices, we can provide some short-term relief perhaps, but the supply and demand issues necessitate a long-term commitment for an energy revolution in our country. In 1999, we could get gas for 90 cents a gallon; those days are past. We must create a secure supply of energy that is pro-national security, pro-environment, and pro-growth. The responsibility rests with all of us.