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Gas Prices Poised to Hit All-Time High

May 22, 2007 at 6:40 PM EST
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JEFFREY BROWN: If it’s Memorial Day weekend, Americans are hitting the road, some 30 million of us this year. And if the summer driving season is getting under way, gas prices are, as usual, going up.

But this season, they’re way up, to an average of $3.22 a gallon nationwide, just about at the inflation-adjusted record high reached in 1981. Coast to coast, many drivers say they’re feeling pain at the pump.

DRIVER: You only budget for so much, and it’s beginning to get beyond the budget.

DRIVER: I work for an eight-hour day. An hour and a half of it’s going to gas.

JEFFREY BROWN: It now costs this California driver more than $70 to top off his SUV.

CALIFORNIA DRIVER: I think it’s ridiculous. I mean, you know, it’s at an all-time high statewide. We’re one of the states that has the most expensive gas.

JEFFREY BROWN: And these truck drivers outside of Boston say the high prices are having an impact on their bottom line.

TRUCK DRIVER: We are losing all the business, you know? We don’t have any money in our pocket after each trip, you know?

TRUCK DRIVER: Their profits — I don’t know many percent he can say, you know — 200 percent to 300 percent. They’re making all the money.

JEFFREY BROWN: Once again, the skyrocketing gas prices have prompted outcries from politicians. The governors of at least 22 states have called for a congressional inquiry.

And on Capitol Hill today, a House Energy and Commerce Subcommittee explored who’s to blame for the high prices. Michigan Democrat Bart Stupak.

REP. BART STUPAK (D), Michigan: We know that the price of crude oil and refinement of oil into gasoline make up 75 percent of the price of gasoline. Big oil is often quick to blame world crude prices, but that argument doesn’t appear to be the full story. Despite the fact that crude oil was $7 cheaper per barrel than last year, gas prices are approximately 50 percent higher.

JEFFREY BROWN: Tennessee Republican Marsha Blackburn.

REP. MARSHA BLACKBURN (R), Tennessee: I certainly hope that, throughout the course of this debate, that my colleagues and I can move beyond a short-sighted temptation to engage in price-gouging finger-pointing. Instead, what we need to do is talk about what it really will take to reduce the cost of gasoline, and that is a commonsense, balanced approach to address the dwindling energy production capacity and the future of renewable energy for this country.

No major disruptions

Amy Jaffe
Rice University
It's really more structural, in terms of how much refining we have in the United States and the pace of the growth in demand.

JEFFREY BROWN: According to the Government Accountability Office, the jump in gas prices has cost consumers an extra $20 billion this year, or about $146 for each passenger car in the country.

And now some views on what's going on from Robert Lieber, author of several books on energy and policy, including his latest, "The American Era: Power and Strategy for the 21st Century." He's a professor of government and foreign service at Georgetown University.

And Amy Jaffe, a research fellow for energy studies at the Baker Institute at Rice University in Houston.

Well, Amy Jaffe, often there are some very obvious international crises pushing up prices. What's going on now? Are you a little surprised?

AMY JAFFE, The Baker Institute, Rice University: Well, it's very surprising, because really, truly, we don't have the kind of disruptions that we're used to when we see this kind of gasoline price.

There's no major hurricane crisis knocking out refining. We don't have a war in an oil-producing region. There's been some disturbances in Nigeria, but not enough really to justify this big rise in gasoline prices. It's really more structural, in terms of how much refining we have in the United States and the pace of the growth in demand.

JEFFREY BROWN: What would you say, Professor Lieber, structural?

ROBERT LIEBER, Georgetown University: Structural. Life would be easier if, in fact, it were due to price-gouging, but that really does not really explain the crisis.

JEFFREY BROWN: What does structural mean?

ROBERT LIEBER: Well, structural means that there isn't enough refining capacity. There's been little expansion of that capacity in the last quarter-century, in part due to the "not in my backyard" syndrome.

But the whole picture of both gasoline supply and the broader issue of dependence on imported foreign oil is a very difficult problem right at the intersection of politics, economics, resources, and national security. And it's very difficult to deal with in political terms.

A tight supply-demand balance

Robert Lieber
Georgetown University
Because the refineries are putting out an amount of gasoline that's barely sufficient to meet demand, the price tends to go up to a disproportionate degree.

JEFFREY BROWN: Well, Amy Jaffe, what do you mean by structural? Explain for us the refinery issue. And who is supposed to be doing what?

AMY JAFFE: Well, I think part of the problem we have is, you have a speculative pressure in the market having to do with how much inventory of gasoline we have on hand in anticipation that this might be the highest driving Memorial Day weekend ever.

So you have this problem, which is, how do you get out of the problem? And we, on a policy basis, just to say, "Oh, we need more refineries," well, you know, there are some oil companies in the United States that have made commitments to more refining -- Marathon, ConocoPhillips -- and we have our Middle Eastern partners, allies. Saudi Arabia, Kuwait have all announced the investment in new refining.

But, right now, we're very tight. And we have the sort of leftover impact of the decimation of Venezuela's oil industry from a strike a few years ago. We used to get over two million barrels a day of gasoline itself from Venezuela, and now, some months, we're only getting a couple hundred thousand barrels a day, so we have to make that up somehow.

And it's very difficult to get out of that sort of chicken-and-egg problem of having demand rise and having the investments meet that demand.

JEFFREY BROWN: But what, Professor Lieber, drives it up right now? I mean, structural sounds big, and it's long term. And many of the things we're talking about we've talked about on this program for many years, the refinery problem. Why right now? Why this weekend?

ROBERT LIEBER: Prices get set at the margins, as economists like to say. So if the supply-demand balance is very tight, a small imbalance can trigger a disproportionate price increase or shock.

JEFFREY BROWN: Disproportionate, meaning it shouldn't be that high?

ROBERT LIEBER: Well, until this week, the price at the pumps, adjusted for inflation, was actually lower than it had been at the height of the previous run-up, which was in 1981. So consumers are hurting, but the pain wasn't so bad as it was, what, 27 years ago. It's only now that the real bite to people's pocketbooks is being felt.

But in this instance, because the refineries are putting out an amount of gasoline that's barely sufficient to meet demand, the price tends to go up to a disproportionate degree. The same thing happens in the world oil market when supplies of crude oil are tight worldwide, and it can happen in the reverse direction, which means prices can sometimes soften very dramatically.

Changing behavior

Amy Jaffe
Rice University
But, really, truly, we have to fundamentally address the future for the use of gasoline in this country. I mean, our growth rates are such that it is going to become very unsustainable over time.

JEFFREY BROWN: Amy Jaffe, we know people hate to pay higher prices at the pump, but what do we know about whether their behavior is changing because of this spike in prices?

AMY JAFFE: Well, there has been some sort of evidence that people are starting to drive less miles on average. I mean, the national average is higher, because of the rising number of cars and growth in population, but we're starting to see people think more seriously about how many trips they're making to the store or taking -- some of the predictions for this summer holiday season is that people will take a vacation in their car but go shorter distances.

But, really, truly, we have to fundamentally address the future for the use of gasoline in this country. I mean, our growth rates are such that it is going to become very unsustainable over time. We're going to become more and more dependent on foreign sources, and we really need to think about things like our policy towards technology.

What are we doing with regulation? Is it better to have a higher price, because that will curb demand? Should we do that more aggressively through some kind of public policy, and thereby have an additional policy that we would help poorer Americans with their fuel costs through a tax relief or some other kind of program?

We're really not proactively seeing the kind of policies it would take to get us out of the situation. The gasoline price we have today, on an historical basis, is the equivalent to $87 oil, if you look at the relationship between crude oil and gasoline over time. And so we're really paying more than we have historically, relative to the price of crude oil.

And it really is about how we use gasoline, what kind of cars we're driving, and also, in other countries, oil companies are required to hold gasoline inventories to make sure there isn't the supply shortage and there isn't the speculative fever, in case of a disruption or weather disruption. We don't require that in the United States. And that doesn't make sense.

When Rita and Katrina hit us a year ago, we had to borrow gasoline from strategic inventory from Europe. That inventory existed because that is held by regulation, as minimum gasoline inventory levels, and we need to consider that kind of policy here.

JEFFREY BROWN: Professor Lieber, put on your forecasting cap. Hard to do, but do these short-term spikes continue longer term? Is three dollars the new norm? Or can you imagine us sitting here next year at Memorial Day weekend talking about four dollars for gas?

ROBERT LIEBER: It could be, but you could be talking about two dollar gas. Most of the major swings in markets have come as surprises in one form or another to the received wisdom.

What you really need to be doing is thinking long term. Steps have to be taken to deal with increasing both supply and decreasing demand. And almost every step you want to take is a political hot potato. To deal with this overall program effectively would require alienating virtually every significant interest group, ideology across the political spectrum.

A need for debate

Robert Lieber
Georgetown University
We need to have the debate. It would be refreshing if we did. I fear that we won't have that debate until we have a real crisis on our hands, significantly worse than where we are now.

JEFFREY BROWN: Alienating everybody.

ROBERT LIEBER: Alienating everybody, but you're going to have to do it if there's going to be a long-time effort to deal with this overall structural problem and tackle these issues, whether it's drilling in Alaska, building more refineries, imposing gasoline taxes, increasing the mile-per-gallon standards per cars, and so forth.

You will alienate conservationists; you will alienate conservatives; you will irritate the auto industry and lots of other groups to boot. Sugar producers, you have to import Brazilian ethanol, which is made much more efficiently and cheaply because they use sugar cane. There's a 54-cent-a-gallon import tax on that.

JEFFREY BROWN: We only have a few seconds here. The presidential campaign is beginning, are you hopeful that we'll have that debate?

ROBERT LIEBER: Well, we need to have the debate. It would be refreshing if we did. I fear that we won't have that debate until we have a real crisis on our hands, significantly worse than where we are now.

JEFFREY BROWN: All right, Robert Lieber and Amy Jaffe, thanks very much.