The unsavory influence of politics on gas prices
By Charles Langley and Laura Impastato, UCAN Advocates
Editor's Note: This story originally appeared in the Sunday, December 16 edition of the North County Times [1].
For years, the oil industry has said that oil prices determine gas prices, but our research suggests that politics has more to do with the price of gasoline than supply and demand.
In October, UCAN published a fever chart [2] showing the relationship between high gas prices and presidential job ratings. The chart shows a “mirror effect” since 2001. It shows a strong correlation between low job approval ratings for the Bush Administration and high gas prices. For example, when gas prices reached their zenith in May of this year ($3.45 a gallon in North County and $3.20 nationally), the President’s job approval ratings dropped to a record low of 29%.
In January 2006, UCAN predicted that gas prices would plummet just before the November 2006 elections. We repeated our predictions [3] in August and September. The forecast raised quite a few eyebrows, because at the time, gas prices had just broken an all-time record in North County. It turns out we called it right. In North County, prices plunged almost a dollar a gallon from $3.26 on August 1, to a low of $2.36 a gallon just two days before the November 7 election. By noon on election Tuesday, gas prices took a sharp curve upward. The following week prices had increased 6¢ a gallon in North County at atime of year when prices normally decline. So how did we call it? Read on:
Saudi Arabia’s Political Promise
In 2004, Prince Bandar of Saudi Arabia, had promised [4] the Bush Administration that it would over-produce oil to bring down U.S. fuel prices prior to major elections. Energy Secretary Samuel Bodman recently acknowledged [5] the cozy relationship between Saudi Arabia and the Bush Administration when he said, “Buyers and sellers have a common interest in maintaining reasonable prices for oil.” This “common interest” is both political and financial. The Saudis understand that high oil prices make realistic alternatives to oil more affordable. Prior to the 2006 midterm elections, the Saudis made good on Prince Bandar’s promise, cutting oil prices by $15 a barrel. But this aggressive over-production by the Saudis doesn’t fully explain the pre-election price chopping.
To put things in perspective, when the price of oil drops by $15 a barrel, it translates into about 36¢ per gallon of gas. Yet eight weeks before the election, the price of gas dropped by nearly a dollar in California, The law of “supply and demand” can’t explain such enormous price cuts.
Political heat equals lower gas prices
Years ago, North County Times Editor, John van Doorn, noticed a direct correlation between the price of gasoline and the level of political protest. He coined the term “Heat to Price” to explain how prices would plunge whenever lawmakers called for industry reforms. UCAN’s research shows that the biggest cause for the price chopping is that California refineries have trimmed their margins. Right now, the political heat is set on high with full burners heating up the energy lobby thanks to new energy legislation passed by the House on December 6. The $21 billion package is an environmentalist’s dream, but a nightmare for Big Oil, U.S. Senate Republicans, and the White House. It mandates that automakers increase average fuel economy of their fleets to 35 miles per gallon, and slaps new taxes on oil companies to fund the development of alternative fuels. The new taxes offset massive tax breaks that were funded by previous oil-backed legislation.
President Bush has promised to veto the new energy plan, and it is expected that it will be filibustered by Republican lawmakers. In the meantime, U.S. oil companies have refrained from their usual gas gouging until the Senate has a chance to vote on the bill. To the oil companies and the Republicans, “energy independence” means keeping the U.S. hooked on highly polluting fossil fuels such as coal and oil. Recent revelations about presidential hopeful Rudy Giuliani show the intimate and incestuous relationship [6] between the energy lobby and Republican interests. At this time, the oil in a gallon of North County gasoline costs about $1.94. with an average gallon selling for $3.28. Earlier this year, North County gas reached a record high of $3.45, but the oil in that gallon of record-breaking gasoline cost almost 50¢ per gallon less. (story continues below graphic).
In other words, even though the price of oil has increased from $62 a barrel to $88, the price of gasoline is lower because refineries are making a little more than half as much money per gallon of gas. Obviously, the price of oil has not been driving the price of gasoline. If California refineries return to the same profit margins we saw on May 9th of this year, gasoline would currently run about $3.90 a gallon … which is what will probably happen as soon as the political heat is off.
Laura Impastato is an Editor and researcher for the UCAN Watchdog, Charles Langley manages UCAN’s gasoline project at www.ucan.org [7]. UCAN is the Utility Consumers’ Action Network, a local non-profit consumer group.