What Can We Do about Gasoline Prices?

0:00Mark Wanley from Ferris State University. It's a pleasure to have you here. You're also an adjunct scholar at the Mises Institute, having come up through Auburn University. Before that, you were in the oil industry. That's true. And you've written an article about how to reduce the gas price, which I'd read just this morning. I thought it was fabulous. I wonder if maybe you would want to talk about that. Yes. Every time we see the gas prices go up, we hear, particularly government officials and the attached media blame speculators and oil profiteers and evil Arab states and people like this.

0:58And they completely absolved themselves of any blame in this issue, although even though they spent decades implementing policies that appear to be aimed at helping OPEC maintain high oil prices and at harming gasoline consumers. Yes. So first, we've got a tax, right? Yeah. We have the direct excise tax on gasoline. A large part of the price of gasoline is taxes, but there's a direct tax right at the pump. And it's a tax of, I think it's 18.4 cents per gallon at the federal level, but the state taxes on average are even higher. And the average excise tax is close to 50 cents a gallon.

1:46I think it's 48 cents a gallon. So, I mean, it just eliminated those taxes by itself trying to... Yeah, almost all that tax ends up being—resulting in higher gasoline prices, so it's almost all shifted onto the buyers in the form of higher prices, and eliminating that tax would almost—would immediately or very quickly reduce the price by close to 50 cents a gallon. Now, then of course you have the supply considerations too. Yes, many of the policies have the result of restricting oil production, in which case you end up with higher oil prices and which lead to higher gas prices. 68% of gasoline prices, it's estimated, are made up of oil prices, oil costs.

2:41Before I talk about the policies, I'd like to mention that the tremendous hypocrisy here of our government officials always blaming OPEC officials for restricting oil production in order to maintain a high price, while they implement policies to restrict our production, which increases the price of oil. And I always find this stunning. And that's a kind of case of, how do you say, projection. Yes. Too different to the discipline of psychology or dated psychology or whatever. Yeah, that's exactly right. But this, I don't think they have a blind spot. I don't think they believe their policies are not doing the same thing. I mean, their policies are directly aimed at restricting the production. Right.

3:26Well, and in addition to that, you've got also a political, very lively political movement out there that believes we should be consuming far less gas and driving up the price precisely for that purpose. Right? Peter Van Doren Sure. There's almost a war on the car here that, you know, the car's – this is moving into velocity. It's almost a symbol of freedom that we get to drive around and do whatever we want. And – Peter Van Doren Do you recall it was early in the Bush years that David Frum was taken on as an advisor to the White House. And he said in one of the first meetings he had with Bush, you know, one thing we could really do for the American people is drive down the price of gas and Bush's response was something like, well, that's what do you mean? That would be crazy. It would cause people to drive more and that's the last thing we need.

4:12Yeah. I think Bush said something like our problem is cheap energy prices. Yeah. So it wasn't really about conservation. It was about the price of gasoline. It was really troubled him that it would fall. Right. Early on in the Bush administration, the price was about $30 a barrel, and then it started to fall early on. We thought, well, it might get to $22 or something a barrel, and Bush said he immediately needed to stabilize oil prices, which means keep them high. So he ordered a significant amount of oil to be purchased, millions of barrels to be put in the strategic oil reserve. And Cheney had his own views about what the price of oil should be, as I recall. He thought it should be more or less in this range, it shouldn't be this and it shouldn't be this, it should be more or less right here.

5:03Yeah, yeah, yeah, he did. But this goes back, the Secretary of Energy under Clinton also said he knew what the right price was. Right, right. But weren't prices under the Clinton years just about as low in real terms as they've ever been? Yes, they were very low. Well, OPEC's power collapsed in the early 80s, and we had low oil prices until 1998. I've been trying to read about this, but in the 2000 election, Bill Bradley was accusing the administration of driving up oil prices directly. The Secretary of Energy was Richardson. In 1998, I think it was, he met with OPEC officials and Bradley was alleging he told them to get that oil price up from $10 a barrel and it took about 12 months and only a 5% reduction in OPEC production created it tripled oil prices over the course of a year.

6:02And the restrictions on domestic production are egregious, just egregious, right? Yeah, I think so. Well, there's direct restrictions where it's just, we're not allowed to drill. We, the oil industry, is not allowed to develop areas where we know there's a lot of oil in the outer continental shelf. The government claims to own the, what do they call them, the flooded lands, I think they are, up to 200 nautical miles offshore. And then they say, since we own them, we can, the government says we're just not going to let you drill in certain areas. And in the oil industry, generally, there's just entrepreneurship has just been just cut off completely. I mean, if I wanted to say, I woke up one day, I thought, you know, I think I would be a very good oil entrepreneur, I'm going to start a new company, you know, like it is in software.

6:52Here's my startup. Here's my oil startup. Possible? Well, it's very difficult. Even 30 years ago, it was fairly straightforward. There was a lot of small oil companies and you could acquire investors and just start with a few, a very small company and build yourself up and new people that did this. And the regulations, the regulatory apparatus is really strangling the small companies. So the larger companies tend to not complain about these regulations and we need to speculate about why but it seems apparent this they end up with most of the oil production right so you've got a in some ways a cartelized oil industry even though it's private in some ways in some ways yes yeah so you've got the handful of oil companies that grow bigger and bigger and never really face that sort of competitive pressure in any case there's not that much room to innovate either because of the regulatory apparatus yeah when I was in business I found myself spending once

7:59Since I moved into the office, I found myself spending about half my time trying to get oil and gas out of the ground and about half my time dealing with government regulations. And you have to appease the regulators and fill out a bunch of forms. You know, I was thinking about what about the squandering of resources to get around these regulations. For example, that BP case, all that drilling out so far in the ocean and everything. What a misallocation of resources when you could obviously be drilling in places that are much more accessible and much cheaper. No, I think so. I think that's exactly right. Why are we taking these risks? Why are we doing this risky drilling one? And one reason we do it is because we're not allowed to drill in some safer places.

8:50And yet there was a kind of a, almost a sort of national hysteria over that BP situation which seems to have fallen out of the news, what happened? Well the whole, first of all the whole tragedy was overblown to begin with and the, I mean we already know that oil, a lot of the oil, if you spill oil in the ocean, a significant A portion of it, say a third, evaporates fairly quickly, because there's this light oil and it goes to the surface and it's gone. And then there are certain organisms in the ocean that tend to eat the rest and the tragedy was overblown. I'd like to say, I think that if you're going to create a spill, you should be liable for any damage to private property.

9:40But we go way beyond this, and the whole situation was completely overblown, I think. I mean, it's being used as an excuse for further restrictions. It's being used to further other political ends, other than simply having safe drillings. Yeah. So do you doubt? Do you have your doubts then? Well, let me ask it this way. What is behind the oil policy? Is it economic fallacy? I mean, surely policy makers know that restrictions on supply, taxation, all the rest of it increase the prices.

10:28Well, I think some of them do know. If you go back to the 70s, William Simon's book said he knew that When they were implementing price controls on oil and things, he said, we knew this was a bad policy, but it's just politically, that's the political realities force you to do these things. Well, what are those political realities with regard to oil? Is the environmentalist ideology so powerful that it would actually have that amount of control over U.S. policy? Policy. Well, I don't think that's the whole story. I think that's a significant part of it, but a lot of these oil companies are multinational oil companies, and some of them have net gains if you restrict US production because it raises the price of oil, and it's like you said, it's a cartilaging device, so your net profits are higher if you have less oil out there.

11:23Have you studied much about all of the fashion for alternative energies and the federal government subsidies trying to find any way to power our civilization outside fossil fuels? Well, regarding alternative transportation fuels, the laws are very destructive. And so, if you had a purely clean gasoline, that wouldn't be good enough because you have You have to have an alternative fuel. You have to have some type of ethanol or methanol, or you have to have electricity, and the various cleaner acts and other regulations force you, even if you had a perfectly good fossil fuel that was clean, that's not the answer.

12:11For instance, natural gas, most of our vehicles could be converted over to natural gas, and we have a lot of natural gas. But that's a fossil fuel, so it's politically unacceptable to consider this option. But if we produce it from corn, then corn's not a fossil fuel. So then it's an official alternative. Yeah, it's an official alternative. So it's kind of a war on a particular source of energy. It's all about paying off politically favored groups, and you can pay off the farmers, and You can restrict oil, which helps some of the bigger oil companies. Yeah. But it's becoming a problem in particular for the airline industry, isn't it? Because we have an industry here that's been sort of hammered again and again and again of some women self-inflicted with the unionization and all the rest of it, and then not fighting hard enough against the nationalization of the security apparatus after 9-11.

13:10and serious financial pressures have led to a growing tendency towards, I don't want to say nationalization, but sort of turning airlines into quasi-public private entities, more or less. And then you get an uptick in the oil price and they have to raise their prices and then you get a lower quantity of flights demanded by the consumer. So this is putting a real squeeze on the airlines, isn't it? Yeah, it is, but I don't think their target is the airlines. I think if things got bad enough, you'd probably see some type of bailout for the airlines also, wouldn't you? Yeah, I mean, everything you said is correct about the airlines. I mean, there's going to be a whole ripple effect for lots of industries if energy prices are high enough. This is a net loss for us.

14:01Would you think that the search for an alternative to fossil fuels is sort of foolhardy in a way, I mean that for the duration as long as far as the eye can see that in the end fossil fuels can be the most efficient way to power it? Well, one thing, we have a lot of oil left. It's a finite resource, but there's a lot out there and as the price goes up, the amount of recoverable reserves increases. So when they tell you how much oil we have, they're thinking how much can we get out of the ground, and at a higher price we can get more out of it. It's profitable to recover more oil. There's also non-conventional oil sources, and there's a lot of it, more than there is in conventional sources in Saudi Arabia. So I'm thinking of things like tar sands and oil shale and there's tar sands in Canada and there's oil shale and there's a tremendous amount of non-conventional sources.

14:58It's very expensive to get much oil out of these sources right now, but that's because we haven't developed the technologies to do it. A lot of the conventional oil we're getting out of the ground, we couldn't have recovered not that long ago. But we've developed new technologies to be able to recover it, and that's what I expect to happen. There will be technological breakthroughs, and this will give us a tremendous amount of additional reserves available. So you don't worry about this so-called Pico oil theory or anything like that? I mean, I gather this is just a kind of a cranky view. Well, there's only so much oil, but I think we'll develop other alternatives before we run out. Also, we've been running out of oil since it was discovered in the 1800s, or since we started drilling for it in 1869.

15:50And as early as the 1870s, you started hearing, in the 1880s, you started hearing we were running out of oil. And it was either the Interior Department or the Mineral Management Services, when it was formed, the reason was we were running out of oil, which was 130 years ago. And then around 1890, we were running out of oil and they discovered a single well in Osage County, the Nellie Johnson in Oklahoma, and suddenly we discovered a huge field and we were running out of oil. The price of oil collapsed. You know, it's remarkable to think that the discovery of oil in the modern sense is so recent.

16:35I mean, one looks back and, you know, immediately in my mind, I was just thinking, gosh, to what extent can we credit oil as the foundation of everything we know of as modern life? It's powered in this age, I mean. Yeah. So, an attack on oil and an attack on the capitalist production of oil is potentially very dangerous. They seem to be attacking, doing a lot of attacks that are potentially dangerous, but certainly this is, regarding powering our economy, this is a very dangerous step, it's a huge risk. And even if we know there's oil available, if we suddenly had a very severe problem, It takes a while to, you can't suddenly reverse everything and say, we can get to this oil, it's going to take a while to develop this.

17:29So even immediate changes, immediate changes would probably have an immediate, some immediate effect on the price because the oil markets are very forward looking. And so if we were expecting to have more oil in seven years, the people that have oil available for production now would tend to produce more and so we would see a reduction in prices probably fairly quickly. You've been writing a lot of articles recently from Mises Org and they've been very exciting, well researched and well done. Thank you for joining us here today. Thanks for inviting me.

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