Friday, March 29, 2013

The Real Reason Gas is So Expensive

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In a recent article in The National Interest, Gal Luft points out that even though domestic drilling is up, fuel efficiency has improved, and America's oil imports are down, gas prices are still high. This is because the price of gas is not controlled by market forces. The price is controlled by OPEC. Luft writes:

Saudi Arabia’s story is more or less the story of the other eleven members of OPEC. The cartel’s modus operandi has been to throttle down supply to drive prices back up while adjusting the definition of a “fair” price. In 2004, OPEC’s “fair” price was $25 a barrel. Two years later, $50 was considered “ideal.” Now the fair price is $100. With the onset of the American oil boomlet, the organization is sure to go down the same path. In fact it already has reined in its supply continuously for six months and is currently producing 30 million b/d, the exact number of barrels it produced forty years ago. Over the past four decades the world GDP grew fourteen-fold; the number of cars quadrupled; global crude consumption doubled. Yet OPEC, which sits on top of three quarters of the world’s conventional crude reserves, has kept its contribution to the oil market the same. Realistically, we cannot defeat the cartel in the courts or with diplomacy. What we can do is deploy what it fears most: competition with our cheap and abundant natural gas.

By opening vehicles to a variety of natural gas-derived fuels, we will be able to pit a cheap and abundant commodity against one whose price is inflated and controlled by a cartel. This is true for compressed natural gas; electricity, which can power pure electric vehicles and plug-in hybrid electric vehicles; or methanol, a liquid fuel sold today for a dollar less than gasoline on an energy-equivalency basis that can power flexible-fuel vehicles that cost manufacturers an extra $100 to make compared to gas-only cars.

The International Energy Agency predicts that by the end of the decade the United States will overtake Saudi Arabia as the biggest oil producer. This may happen, and there are many reasons to welcome the development. But we should not delude ourselves into thinking that the role of driller-in-chief will bring lower crude prices. It won’t. Unless we break oil’s virtual monopoly over transportation fuel it will be the disgruntled youth in Riyadh who will determine how much we pay at the pump.

Oil is a monopoly, and OPEC is exploiting it. The solution to a monopoly is competition. Click here to find out what you can do to encourage competition in the fuel market.

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