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Why 'Gas Out' Won't Work
by Gary Foreman
Don't know about you, but I'm sure tired of rising gas prices. And based on my mail many of you feel the same way. Lately I've received dozens of copies of an email encouraging people to support a 'Gas Out' from April 7 to 9th. Everyone would refuse to buy gas those days. The email says that last year's effort was successful in sending a message to those that produce gasoline and we need to do it again.
You're not going to like what follows. In fact, some of you will probably think that I work for the oil companies. I don't. But I can pretty much tell you that "Gas Out 2000" won't work. It might draw some media attention. But it won't change the price you pay at the pump by one penny. And if you'll consider the facts you'll understand why.
According to the American Petroleum Institute Americans consume about 8.4 million barrels of gasoline and 3.5 million barrels of heating oil/diesel fuel daily. That's about 13% more than we used 10 years ago. We import a little over half of the oil that we consume. So use is up and we're still very dependent on the OPEC.
If we compare historical gas prices we'll learn something interesting. Retail prices peaked at $1.35 per gallon in 1981. In 1998 they were as low as $1.22 per gallon before jumping all the way to $1.44 in February, 2000. And the trend continues higher.
But, that really doesn't tell us what's going on. A number of different costs go into that gallon of gasoline. The retail price includes the cost of crude oil. The oil companies incur costs to refine and distribute it. They also keep some profit. Finally our government adds taxes.
Let's begin by considering taxes for a moment. In 1981 the average gallon of gasoline carried taxes of 14 1/2 cents. By 1998 they had crept up to an average of 41 cents per gallon. We were paying less at the pump, but that hid the fact that taxes had nearly tripled.
From 1981 to 1998 the price to get a gallon of oil to the pumps dropped from $1.21 per gallon to $.71. Unfortunately for consumers that was the low point. By February, 2000 it had gone up to $1.03 per gallon.
So there are two increased costs that we're seeing today. The extra 26 cents per gallon in taxes and recently the 30+ cent increase in the cost of the gas itself. Which leads us to the next question. Why has the cost of gasoline increased so dramatically?
Two things must happen for there to be gas at your local station. First, someone must get a barrel of oil out of the ground. That's the cost of crude (unrefined) oil. Then someone must refine the crude into gasoline, distribute it to gas stations and make a profit on it.
Since early 1999 crude oil prices have jumped from $11 to $30 per barrel. OPEC had suffered through declining prices for a decade. Last spring they decided to produce less.
The strategy comes from Economics 101. If something is rare it's more valuable. OPEC has the ability to make crude oil rare by reducing production. They'll sell fewer barrels, but get a higher price per barrel.
Compare the low 1998 prices to now. In 1998 crude oil to make a gallon of gas cost 30 cents. Today it costs 68 cents. The shortage that they've created has added 38 cents to the cost per gallon. No question, we've discovered a bad guy!
But what about the oil companies and gas stations? Are they getting rich, too? As it turns out, the gas companies are actually getting less now than they did in 1998. Back then they were getting 41 cents per gallon. Now they're only getting 35 cents. So clearly the blame isn't with Chevron, Hess or Joe who owns the corner station.
Some of you probably think that we just demonstrated why the 'Gas Out' is so important. So let's suppose for a moment that the event is wildly popular. Everyone joins in.
So how much effect will the 'gas out' have on OPEC and those who pull the oil out of the ground? Probably not much. Here's why. Whether you buy gas on April 8th or not doesn't affect them. The gas you buy today was produced months ago. So buying a day or two later has no effect on them. A two day disruption is no big deal. It happens every time there's a snow storm.
But, I can still hear some of you saying that we need to let them know that we're mad and demand changes. Know what? You can yell and 'gas out' all you want. OPEC is already measuring if you're really serious. They can tell by monitoring two things. First, are we buying bigger or smaller cars. Second, is the demand for gasoline going up or down.
OPEC has already started to talk about increasing production. Kuwait's oil minister, Sheik Saud Al Sabah, was receptive to a recommendation from Saudi Arabia, Venezuela and Mexico to increase production. Why would they produce more now?
It's simple. They want to make as much money as possible. If Americans shift to smaller cars like we did in the 70's then demand will go down for years to come. So they want to raise prices to just below the point that you'll use less.
Another reason that the 'Gas Out' won't work is that on March 27th OPEC will hold a meeting to determine how much oil to produce once the current agreement expires in April. That's weeks before the 'Gas Out'.
One place that the 'Gas Out' could help is in triggering the President to release some of the strategic oil reserve. According to the Department of Energy 565 million barrels of oil are being held for an 'energy emergency'. In the past reserves were tapped during the Gulf War. If the President 'feels your pain' he has the ability to release some of the reserves.
So if a 'gas out' won't help, what can you do? One very practical thing. Use less gas. Carpool, take public transportation, combine trips or get your car tuned up. Anything you can do to save gas will put more money in your pocket. And that's the one 'statement' that oil producers will notice. More importantly, you'll notice it in your wallet, too.
Gary Foreman is a former Certified Financial Planner who currently
edits The Dollar Stretcher website www.stretcher.com
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