How High is Your Gasoline IQ? Take the Test!

With gasoline prices rising and American electoral politics in high gear, there’s a lot of talk these days about who’s responsible for the cost of fuel and what to do about it.  In case you’re among the interested, we thought it would be good to offer a Gasoline IQ Test, so our readers could assess their expertise in this topic of near-universal interest.

Answers are provided below.  We’re on the honor system here at the Clothesline Report, so we’re counting on you not to peek before giving your answers.  So have a go, and show  us your stuff.

Gasoline IQ Test

• True or false:  Gasoline prices today in America are higher than they’ve ever been.
• True or false:  Today’s high gasoline prices are the result of government restrictions on drilling.
• True or false:  The U.S. imports too much gasoline.
• True or false:  Gas prices would be lower if the President approved the Keystone XL pipeline from Canada.
• True or false:  Rising gas prices make us less competitive with foreign countries.
• True or false:  If we produced enough oil to meet U.S. demand, gasoline prices would be lower.
• True or false:  Oil imports make us hostage to Middle East petro-states.
• True or false:  Compared with other countries, Americans use gasoline with about average efficiency.
• True or false:  In a perfect world, gasoline would be as cheap as water.
• True or false:  The Federal government could do a lot more to reduce the cost of gasoline.

End of exam.  Congratulations! You’re done. How’d you do?  Pretty easy questions, right?  I thought so.  So, now, you can peek at the answers below, as long as you promise not to change yours before turning them in.

True or false:  Gasoline prices today in America are higher than they’ve ever been.

False.  In the summer of 2008, when George W. Bush was wrapping up his second term, the average cost of a gallon of gasoline in the U.S. was $4.34 for two months straight.  Today, average prices have just broken $3.70.

True or false:  Today’s high gasoline prices are the result of government restrictions on drilling.

False.  Crude oil prices are the main determinant of gasoline prices. A key issue affecting crude oil prices in recent months has been uncertainties around supply stemming from tensions with Iran as new U.S. and EU sanctions come into place. Unrest in several small oil producers, including South Sudan and Yemen, has also led to supply disruptions. Also, there are persistent concerns about the adequacy of global supply in the face of sustained demand growth in emerging economies such as India and China. Recent refinery closures in the United States, Europe, and elsewhere also contribute to higher gasoline prices, particularly in parts of the East Coast.

We cannot find any industry experts who argue that today's prices are linked in any way to U.S. drilling levels, which are actually very high.

True or false:  The U.S. imports too much gasoline.

False.  The U.S. is a net exporter of gasoline, not an importer.  Of course, we are the world’s largest importer of crude oil, but we refine and sell gasoline – the thing that’s got us so worried – to the world at world prices.

True or false:  Gas prices would be lower if the President approved the Keystone XL pipeline from Canada.

False.  Gasoline is cheapest in the Midwest today for one reason: There is no Keystone XL Pipeline.  Canadian crude oil comes by pipeline to the heartland of America, and is refined there for domestic use. If the KXL pipeline is built, the oil will bypass the Midwest, and go to Gulf Coast foreign-owned refineries for export to world markets.  There is ample research indicating that gasoline prices will rise, and Midwesterners will be hit the hardest.

True or false:  Rising gas prices make us less competitive with foreign countries.

False.  Gasoline in the U.S. is incredibly cheap already by world standards.  Of 141 countries tracked by the U.S. Energy Information Agency, the U.S. ranks 101 in retail gasoline prices.  U.S. consumers pay only 77% of the world average price for gas.  And among the 100 countries whose residents pay more than we do are Australia, Canada, India, Mexico, all of Europe, Brazil, South Korea and Japan (whose people pay 2.3 times as much as we do).

We think our gas is expensive?

True or false:  If we produced enough oil to meet U.S. demand, gasoline prices would be lower.

False.  U.S. gasoline prices are determined by global supply and demand.  As a free market economy, we permit oil companies (most of which are multinational or foreign) to sell at home or abroad.  Whenever there is a threat to stable oil supplies – as we see in Iran, Yemen and Sudan today – world prices will rise.  And even in good times, meteoric demand growth in China and India will snap up existing supplies at increasingly high prices. 

True or false:  Oil imports make us hostage to Middle East petro-states.

Mostly false.  Granted, Saudi Arabia and the Gulf States export lots of oil to the world.  But of America’s six largest oil suppliers, five have nothing to do with the Middle East: Canada, Mexico, Venezuela, Nigeria and Russia.  Only Saudi Arabia – with only 13% of our imports – makes that list.

True or false:  Compared with other countries, Americans use gasoline with about average efficiency.

False.  Really false.  To begin with, no one anywhere in the world comes near the U.S. in gasoline consumption per capita.  The average American burns as much gasoline in a year as 2 Aussies, 4 Britons, 5 Italians, 7 Frenchmen, 8 Koreans, 18 Brazilians, 37 Chinese or 163 Indians. Here’s the data:

U.S. gasoline use per capita (in red): highest on the planet

And it’s not all because we drive so much further (although we do).  Our cars are so much less efficient.  Here’s a look at our past and projected national fuel efficiency, compared with Europe, Japan and China.  When it comes to efficiency, we’re dead last.  Here are the facts:

True or false:  In a perfect world, gasoline would be as cheap as water.

False.  Our world isn’t nearly perfect, and gasoline is already cheaper than most brands of water.  You might object: tap water is much less expensive.  But I would reply, I’ve been generous, pricing bottled water on liter-size purchases.  Most people I know buy their drinking water in 20-ounce bottles for $1.00 or more, raising the price to more than $6.00 per gallon. Here’s where gasoline ranks in price:

True or false:  The Federal government could do a lot more to reduce the cost of gasoline.

Mostly false.  There are limited short term options available to policy makers to address gasoline price increases. In theory, the government could pursue several short-term options, each of which is possessed with problems.

Release the Strategic Petroleum Reserve. This has been done twice in our history: first by President  Bush 1 during the Kuwait “Desert Storm” war, when the Straits of Hormuz were effectively closed; and second, by President Bush 2 after Hurricanes Katrina and Rita.  Both were examples of what the reserve was designed for – an alternative source when supplies are temporarily constrained by international or natural disruptions.  If we released the reserve because of fears about war with Iran, what would we have if that war actually broke out? And what would the process of refilling it do to prices?

Declare a Gasoline Tax Holiday.  We pay a small tax – only 18 cents per gallon – to fund the National Highway Trust Fund and to help clean up leaking underground storage tanks.  For the sake of $0.18, we’d let our highways crumble and our groundwater become contaminated from thousands of leaking underground tanks?  I don’t think so.

Relax Fuel Specifications.  Every summer, the U.S. tightens fuel cleanliness standards to alleviate smog and related respiratory diseases.  We could try to cut costs by permitting oil companies to sell dirtier fuel.  But to do that, Congress would have to amend the Clean Air Act, resulting in dirtier urban air and increased infant respiratory diseases.  Even this Congress won’t find the required majority in both houses to sacrifice our kids for a few cents at the gas pump.

Restrict Gasoline Exports. Of course, it’s tempting to think that we could just force the oil companies to keep the gasoline here, isn’t it?  There are problems: GATT, NAFTA, and basic American economic principles, among others.  Stalin or Ahmadinejad could pull this off.  We can’t.

Limit Financial Speculation.  Much has been said recently about Wall Street traders driving up the cost of oil by placing bets on commodity trading markets.  While the derivatives they use have real value for refiners and oil producers, raw financial speculation in oil futures has shot up in recent years.

The Dodd-Frank Wall Street Reform and Consumer Protection Act just took effect, and it includes measures that limit speculation in oil markets.  However, market participants are not required to comply for several months until certain procedures are completed.  And while – of all the proposed “fixes” – this is probably the most promising, there is much uncertainty about the extent of the help it will provide.

So, you’ve taken the test and checked your answers.  How did you do?

More importantly, in light of these answers, what should we do to bring down gas prices?

Well, why do we think they should come down?  In a world of finite fossil fuels, who says that we should deal with energy costs by exhausting our resources faster and cheaper ? Get the price down, and drill, baby, drill? So that our children will have nothing left, but a degraded, sickly and resource-poor planet? Why is that so appealing?

I think we’ve got a much better way.  We didn’t invent it, but the logic is compelling:  Fossil fuels are only cheap because someone else bears the costs of their side effects.  Urban children bear the lifelong cost of  asthma and other diseases related to smog; Appalachian babies bear the lifelong costs of toxic levels of mercury and other heavy metals from coal production and burning; people everywhere bear the cost of bottled water because of ground and surface water contamination from gas drilling and oil leaks; and people in every country bear the costs of drought, flooding, disease and crop losses brought on by increasing greenhouse gas concentrations in the atmosphere. Why should oil buyers and sellers expect to be subsidized by all these innocent victims?

So here’s the idea:  Make fossil fuels pay for their own side effects.  In gradual increments, impose a national fee on fossil fuels so that the initial cost more fully reflects the real cost to our country and our world.  But don’t pocket the money in the U.S. Treasury.  Instead, pay an equivalent dividend back to each American adult, so that all the money goes right back into the economy.  Sure, gasoline would be more expensive, but everyone would have an offsetting sum of cash to handle the increase.  And with gasoline now reflecting more of its true cost – like in most other countries in the world – American consumers could make thousands of daily decisions that would make us more competitive, healthy, and better stewards of the world God has entrusted into our care.

[To learn more about this idea, take a look here at a proposal by NASA’s chief climate scientist, Dr. James Hansen.]

The next time someone complains to you about the cost of gasoline, or their big plans to bring the price down to something like $2.50, you’ll have all kinds of interesting things to tell them, won’t you?  Maybe we’ll finally come to accept that we’re part of world markets that we don’t control, and a world ecosystem that’s in dire peril due to our ongoing fixation on cheap fossil fuels recklessly wasted.

Thanks for reading, and may God bless you.

J. Elwood

Follow @John_Elwood