The national average price for a gallon of gasoline is quickly approaching $ 3. Some states are already there. Facebook memes and Twitter trolls quickly condemned the change of power, pointing out that prices have risen about 45 cents per gallon since President Joe Biden took office. But is that true?
In reality, gasoline prices have risen for nearly a year.
There are several factors that affect the price of a pump, but the biggest one is the price of crude oil, which is 43% of the cost. The United States is the world’s largest producer of oil, but oil is a globally traded commodity. Therefore, events that affect the supply and demand of oil in the United States and around the world affect the prices displayed at stations.
OPEC and Russia have agreed to continue cutting production in order to push up prices, which began to fall sharply a year ago. But now demand is recovering. In the United States, the introduction of the COVID-19 vaccine and the relaxation of blockade restrictions have led to the highest percentage of Americans traveling since the pandemic.
Economic activity in other major energy consuming countries, especially China, is also increasing. As a result, the price of a barrel of crude oil has remained at around $ 60, almost double what it was a year ago.
Refining is the second largest cost, accounting for a quarter of the retail price of gasoline. The recent severe cold wave on the Gulf Coast not only reduced domestic oil production by 10%, but also destroyed 20% of the country’s refining capacity offline.
In addition, spring is the season when refineries are rebuilding their operations to switch from a winter blend of gasoline to a summer blend. Summer blends reduce the components that form smog when the fuel evaporates faster in warm weather. In addition, different states have different standards, which can increase prices by 5 to 15 cents and increase manufacturing costs in some regions.
On average, federal and state taxes add an additional 30 cents per gallon, accounting for 22% of retail prices. Theoretically, the gasoline tax is an efficient user fee for maintaining the national highway system. However, in reality, for projects such as public transport, special stakeholders will soak up the petrol tax because the benefits of the project must be evaluated and paid at the state or local level.
Americans are paying higher “hidden costs” today from bad public policy decisions made decades or more than a century ago. For example, the Jones Act passed in 1920 requires goods shipped by water between two points in the United States to be shipped on a U.S.-made U.S.-registered vessel with a crew of at least 75% American. .. The Jones Law pushes costs up by preventing competition from foreign countries without providing significant economic or national security benefits. As a result of this policy, Professor James Coleman of Southern Methodist University points out that “refineries in the northeastern United States are more than three times more expensive to transport oil from Texas than from West Africa or Saudi Arabia.” did.
Another hidden cost is the renewable fuel standard, which was passed in 2005 and extended in 2007. The policy requires billions of gallons of ethanol (mainly corn-based) to be mixed with gasoline each year. The Government Accountability Office reported in 2019 that mandates have increased fuel prices due to limited, if any, environmental or climatic benefits outside the Midwest.
The poor legacy of market-distorting policies should serve as a warning to President Biden. While it is inaccurate to blame the current administration for the recent rise in gasoline prices, the actions taken today have long-term implications. The impact on prices due to the cancellation of the Keystone XL pipeline and the ban on the sale of new oil and gas leases on federal land may not be reflected in today’s prices. However, the decision to limit supply now will affect prices later.
The economic impact may seem modest. A few pennies here, a few pennies there. But collectively, the price impact of such policies begins to sum. When you multiply the 337 million gallons of gas that Americans consume every day, it actually begins to add up. All pennies should be counted, as Americans continue to keep track of the economic collapse of the pandemic.
Nicholas Loris is the Deputy Director of the Heritage Foundation’s Roe Institute for Economic Policy Studies.
Soaring gas prices: look under the hood
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