How to lower gas prices
Dear Editor:
I want to preface what I am going to say by reminding you that I am a physicist and not a commodities trader, so you should check the facts and come up with your own conclusions. I want to discuss gasoline prices and how to bring them down in the relatively short run. First, I will say what will not work.
Drilling in ANWAR, for example, whatever its merits, has nothing whatever to do with bringing prices down now. It would be years before this oil comes on line. Abolishing taxes on gasoline will not help much, if at all. The present Colorado state tax is about $0.22 per gallon, while the federal tax is a bit more than $0.18 per gallon. Thus, if these taxes were abolished tomorrow morning, it would reduce the price I saw in Aspen this morning from about $4.80 per gallon to $4.40 per gallon. But this is a per-gallon tax, and if the price of gasoline rises by $0.40 the effect is lost. The only short-run solutions of interest are those that will bring down the price.
A significant fraction of this price is the price per barrel of oil. The rest goes into things such as refining, transportation and so on. To make a dent in the price of gasoline, we must make a dent in the price of oil. Much of this price is a function of supply and demand. I am not sure we can do anything about this, because if we reduce our demand here, countries such as India and China will take all they can get, maintaining the price. But on top of this driving force, there is speculation. I have heard estimates that range from a minimum of 25 percent to an OPEC estimate that the correct price of a barrel of oil should be about $70 as opposed to $140 ” a factor of two. Oil is priced, at least for the time being, in dollars, and the dollar is falling. Thus, it pays for a country like Saudi Arabia to keep its oil in the ground, with its price rising as the dollar is falling. But there is something that can be done about speculation.
In 2000, Sen. Phil Gramm helped to enact what is called the “Enron exception.” (His wife was then on the board of Enron.) This exemption enabled oil speculation to occur free of regulation. There are no margin requirements and no limits. I have read that companies such as Goldman-Sachs hold more in oil contracts, by a very large amount, than all the oil in our federal reserve. You might keep this in mind the next time you hear one of these people predict that oil will rise to $150 a barrel. It is essential to get rid of this exemption and to put oil speculation back under the regulations that existed for decades before 2000. This is something that Congress can do in a heartbeat and will really effect the price of oil.
Jeremy Bernstein
Aspen
