Do you believe that gasoline is cheap in the United States? According to CNN Money, fuel (gas, petrol, oil, diesel) in the US is relatively cheap in the US compared to other countries. Why is that and could it be even cheaper?
In the article Why Gas in the U.S. Is So Cheap, Steve Hargreaves examines why oil is cheap in the US compared to the rest of the world. The basis of the article is that taxes in the rest of the world, especially Europe, make oil more expensive in those countries.
Making Gas Costs The Same Everywhere
From part 1 we know that the most expensive component of gasoline is crude oil. Oil refining costs the same to make no matter where it happens. From the Yahoo article:
Gasoline costs roughly the same to make no matter where in the world it's produced, according to John Felmy, chief economist for the American Petroleum Institute. The difference in retail costs, he said, is that some governments subsidize gas while others tax it heavily.
Remember, crude oil is a commodity. That means no matter where you pull it out of the ground, it's basically the same. That's not exactly true but for the sake of discussion let's assume that oil is oil.
Governments Control the Price of Oil
We like to think that the United States has a free market economy. We are constantly told by the media that we live in a new world economy where nations don't matter and goods flow freely around the world. Unfortunately that is either a myth, wishful thinking or just a flat out lie, depending on your agenda. Governments control the price of oil with taxes and subsidies.
Oil Importing Countries Tax Oil Heavily
Countries the import oil, especially in Europe, tax fuel very heavily. In fact, 9 out the 10 countries with the most expensive gasoline are in Europe. Many European socialist countries use gas taxes to finance their government welfare programs.
However, Europe is also unique in that is very wealthy and densely populated. Mass transit systems can take you all over Europe. It's very easy to walk where you need to go. Most of the towns and cities in Europe existed long before automobiles, so they are much more friendly to foot traffic than American cities.
European governments see gasoline as a luxury for those who chose to drive their own automobiles. Hence, the high taxes are justified as a means to control behavior, that is limiting driving of personal automobiles, in favor of public transportation and/or walking and biking. While this may work well in Europe, the United States is much different.
The United States
The US has a much different situation than Europe. The United States has a large and relatively sparsely populated geographic area. This is the reason mass transit just isn't as popular as in Europe. Mass Transit just doesn't work well in much of the United States.
The government can subsidize mass transit all it wants but it just won't matter. American cities are sprawling. And why shouldn't they be? The United States has an abundance of land. Imagine living in the early 1900's. The cities are dirty, smelly, crowded and polluted. Now imagine you had the chance to move out of this environment to a nice clean suburb where there was plenty of clean air and living space. Which would you choose?
Americans are very affluent compared to the average world citizen. We get what we want because we have the money to pay for it. Many people want green lawns and parks and nice schools. That means living in the suburbs, which means commuting. Commuting means taking kids to school and then driving to work. This requires a lot of gas, hence America's thirst for oil.
Here's the part that you're not going to hear anyplace else. The genie is out of the bottle. No matter how many anti-sprawl ordinances are passed, or how many mass transit boondoggles are funded, there is no changing America.
So it's obviously in the best interests of most sane Americans to pursue a cheap energy policy. Oil is the lifeblood of the US economy. There is no technology right now that can replace petroleum. Even if you could invent a car that ran on water overnight, replacing every automobile in the country would be the most expensive economic endeavor ever undertaken. You'd gradually replace all the of the current automobiles over the course of 10 to 20 years.
Now we understand that most politicians must walk a very thin line when dealing with gasoline taxes. Notice that the current crop of presidential candidates is talking about taxing the oil companies, not consumers directly. However, they fail to mention that the oil companies would have to pass those new taxes as increased gas prices to consumers or they would simply stop producing oil. The petroleum companies are not charities.
There is no short term cure for high oil prices in America. We've declined to expand our domestic production and we refuse to build new refineries. Yet on the other hand, in an act of pathological self delusion, we continue to consume oil, yet complain about sending our money to Middle East Thugs and tin pot dictators that would like nothing more than for the United States to be "put in it's place."
In part 3 I'll talk about what you can actually do about the price of fuel (gas, heating oil, etc). For now let's leave the discussion where it is and examine another interesting case.
Oil Exporting Countries Subsidize Gas Prices
Some of the main oil exporting companies subsidize the price of fuel to drive economic expansion and to keep their people happy. It's also no coincidence that many of thise countries have repressive regimes that need a way to keep their people happy.
In Venezuela gas is 12 cents a gallon. That's right $.12/gallon. In Iran its 40 cents, Saudi Arabia, 45 and Libya, 50 cents. These countries aren't exactly the centers of learning and enlightenment in the modern age. The oil money allows the despots in these countries to control their people with the purchase of weapons, bribes and well timed hands out to the people.
Because these countries subsidize gas consumption, domestic demand is high, limiting export to countries that would pay more for the oil, which further distorts the "free market" for oil.
Then there's OPEC. OPEC could easily be the evil criminal organization in a James Bond movie. OPEC is an cartel that tries to maintain artificially high prices for oil by limiting production. The member include: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Not exactly the "A list" of nation states.
Read Part 3
We've talked about where each dollar at the pump goes in part 1. In this article we discussed the price of gas around the world and why it's so high in some countries and so low in others. In Part 3 we'll discuss what you can do about high fuel prices.