Gas prices are now comfortably in the $3.00/gallon range across the country.  Both Democrats and Republicans are lining up to bash President Bush on the current gas price situation.  Both sides are charging collusion, price fixing and gouging.  It seems as if everyone is calling for investigations and penalties levied against the oil companies. 

What’s really going on?  First off these charges are at best, irresponsible, at worst, typical pandering for sound bites by politicians who don’t understand how markets work and have no desire to actually take the time to learn about them.

The price of oil is set based on supply and demand with significant influence exerted by OPEC.  The market is global with both buyers and sellers looking at a wide range of data which in turn influences their outlook. Should demand rise at a faster pace than supply, as is what’s happening right now, prices will rise.  Supply disruptions including reductions in output have a similar effect.

The global oil market is huge.  So large is this market, no one player or group of players could hope to manipulate it.  Has the invasion of Iraq led to a reduction of supply? Yes. 

Has increased global demand had an adverse effect?   Absolutely.

Nations such as China and India have greatly increased their demand for oil to help their burgeoning economies expand. India’s annual growth rate is 7 percent; China’s annual growth rate is approaching 9 percent.

Federal regulations have also had an effect.  Low-sulfur refining requirements take effect in June adding to the situation and refiners are also phasing out MTBE—the additive that is required is some parts of the country to reduce pollution during the summer.  The winter blend of gasoline must be cleaned out of the refiner’s systems before the summer blend can be produced.  This process causes reserves to be drawn down short-term.

Ethanol is replacing MTBE in many areas across the country.  As a result, there are reports of potential ethanol shortages partly due to increased demand and the fact that ethanol corrodes pipelines so must be shipped by rail.  The use of railroads increases the transportation costs significantly.    

Oil refineries are still not operating at full capacity as a result of hurricane damage and there is just a whole lot of uncertainty in the marketplace as a direct result of Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez opening their mouths.  Some experts believe that this duo may be responsible for up to $10.00 of uncertainty per barrel.

Excessive taxation of oil company profits will have little effect and will most likely cause more harm than good.  Pension funds and Mutual funds own millions of shares in oil companies and these record profits are helping to build retirement nest eggs for many, many Americans.  Profits are already being taxed providing a windfall for federal, state and local governments.  I’ve yet to hear a politician refuse this tax money due to the fact that collusion, price fixing and gouging may have contributed to the additional funds available for various pork barrel projects.

The short-term solution for most of us is simply this: we must conserve as much energy as possible.  Here are a few ideas to help:

• Plan your errands and excursions. 
• Enlist your friends and neighbors to help out.  Go shopping together or take turns driving the kids to little league. 
• Take public transportation as often as possible or look into car-pooling. 

Blame President Bush for other things if you like but the price of oil is clearly not his fault. 

Americans have an uncanny ability to adapt in times of crises. If you have any good ideas, let us know or add them as comments to this article.