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Posted: 5/10/2004 10:00:22 AM EST
May 10, 2004, 8:25 a.m.
Stick a Pump In It
Gas prices aren’t even near their historical peak.

By Stephen Moore

A headline in Wednesday’s edition of USA Today read: “Oil Prices Hit Highest Since Sept. 1990.” The story glumly reported that “oil traded for more than $39 a barrel last week … the highest closing price since 1990 and the 6th highest price ever.”

Good news: It isn’t true. Yes, gas prices have spiked upwards by at least 30 percent in most local markets this year, and yes, it’s infuriating to pay $2.00 a gallon to fill up the tank. And yes, higher oil prices are a significant tax on the U.S. economy — given that we’re the world’s largest importer of crude.

But prices, properly measured, are nowhere near their historical peak. In fact, the long-term trend in oil, gas, and electricity prices is downward, not upward.

What the reporter at USA Today and so many other fear mongers forgot to do was adjust for inflation. In the world of economics, this is an unpardonable sin. After all, if you don’t adjust for inflation, just about everything is more expensive today than 30 years ago.

So let’s look at the long-term trend for gas prices in inflation-adjusted dollars.

Gasoline prices paid at the pump have been on a steady rate of decline since the 1920s, with the obvious exception of the 1970s, when we faced an OPEC embargo and gasoline lines. In 1920 the real price of gas (excluding taxes) was twice as high as today. Electricity prices were about three-times higher 75 years ago.

If gas prices were as high today as they were in the late 1970s, we would now be paying about $6 a gallon for gas. Today’s price at the pump is higher than it was as recently as 1985.

The same is true, by the way, for the cost of oil. Adjusted for wage growth, oil is slightly cheaper today than it was 20, 30, and 50 years ago, and five-times cheaper than 100 years ago. How can gas and oil be cheaper since we’ve used so much of it over time? Well, thanks to human innovation, we are always finding new sources of oil, while at the same time technology makes it cheaper to drill for it.

For example, the oil fields of Prudhoe Bay in Alaska have two- to three-times more reserves than originally believed. Russia, now on the way to becoming a capitalist economy, may soon become one of the world’s top two oil producers, as the new Russian capitalist entrepreneurs continue to discover new untapped fields.

Of course, if Congress would only allow us to develop new oil sources here at home, gasoline prices could easily slip comfortably below $2.00 per gallon. When oil prices were $25 per barrel, we had the luxury of not drilling for more oil in Alaska. But now that the price is nearing $40 a barrel, with a good share of that money pipelined to Arab nations that are not always friendly to us (petrodollars have no doubt been siphoned off to terrorist networks in recent years), developing greater energy independence is no longer a luxury. In fact, it’s an economic and national-security necessity of the first order. Any energy bill signed into law by the president this year must include the rights to drill in Alaska.

John Kerry has complained that President Bush is doing nothing to contain gasoline prices, but Kerry has been the consistent adversary of people who drive cars. He has supported gas-tax hikes of as much as 50 cents a gallon. He has also voted “no” every time he’s had the chance to sink plans for drilling in Alaska, saying that doing so would endanger the environment for moose and elk. But it’s likely that the biggest beneficiaries of Kerry’s intransigence on drilling have been Arab oil exporters.

High gas prices could be a thorny political issue as we enter the spring and summer months, when travel across the country rises. But travelers should take solace in the fact that we now pay more for gas, adjusted for inflation and wages, than our parents and grandparents ever did. That’s true even though the oil cartel, OPEC, holds the world price at least twice what it would be if there were a competitive marketplace at play. After all, in Saudi Arabia and many other oil-producing nations, oil costs about 50 cents per barrel to produce.

The best way to break the back of OPEC is to produce more oil here at home; if only our politicians would allow it.

— Stephen Moore is president of the Club for Growth and a senior fellow at the Cato Institute.
Link Posted: 5/10/2004 10:04:22 AM EST
Saudis Urge OPEC to Hike Oil Output

Mon May 10, 8:06 AM ET Add Business - AP to My Yahoo!

RIYADH, Saudi Arabia - Saudi oil minister Ali Naimi urged OPEC (news - web sites) on Monday to raise its production ceiling by 1.5 million barrels a day when it meets on June 3.

The announcement by OPEC's largest producer comes as U.S. prices have risen to nearly $40 a barrel and gasoline prices have been pushing higher with the peak summer driving season approaching. OPEC pumps about a third of the world's oil.

"It is certain that the kingdom believes that increasing the OPEC production ceiling is essential to keep supply and demand balanced," Naimi said in a statement.

He added the increase should "not be less that 1.5 million barrels a day."

Naimi's statement represents a shift in Saudi oil policy. Only in March the kingdom was reportedly the chief advocate of a decision by the Organization of Petroleum Exporting Countries to cut production in anticipation of a lower demand for oil during the spring and summer.

OPEC currently has an official ceiling of 23.5 million barrels a day.

Naimi said he would discuss the market situation with other OPEC members May 22-24 at the International Energy Forum in Amsterdam.

OPEC's June meeting will be held in Beirut, Lebanon.

Naimi said recent price increases were a "major concern" to Saudi Arabia.

"We do not want to see prices rise to the level that they negatively affect the growth of the international economy or the demand for oil," he said.

The minister said the most important reason for higher oil prices is "the market's unwarranted fear of disruptions in supplies from some oil producing countries and regions at a time when only the kingdom and probably two or three other countries have spare production capacity."

Market speculation is another factor, he added. He said traders were holding long-term contracts for commodities such as oil because economic growth was robust and interest rates were low.

Traders said last week they were increasingly worried about the possibility of attacks against petroleum industry targets in the Middle East at a time when supplies are tight and demand is strong.

Oil for June delivery rose as high as $40 Friday on the New York Mercantile Exchange before settling at $39.93 — the highest level in more than 13 years.

The last time the front-month futures contract settled above $40 was on Oct. 11, 1990, when oil was valued at $40.42 per barrel leading up to the Persian Gulf War (news - web sites). In today's dollars, adjusting for inflation, that would be equivalent to $56.83, according to the Energy Department.

Link Posted: 5/10/2004 10:05:50 AM EST
I love it when authors try to convince me that "Gas Is Still Cheap" when I'm paying fifty cents or more for gallon than I did last year. Hell, I just noticed it jump 6 cents locally in two days! All while the Oil companies are making record profits! Exxon/Mobil was #2 in profits last year in the United States. How is this possible if their not making more profit from each gallon we buy. Certianly makes me wonder about who really runs America.
Link Posted: 5/10/2004 10:07:19 AM EST
It cost me $22.25 to fill up with regular, and I drive a Taurus.
Link Posted: 5/10/2004 10:10:23 AM EST
Part of the high price of gas is our own damn fault. People drive SUV's with V8's that get 12MPG, that keeps the demand high and the supply low. When you don't have much of something but everyone want's it you can raise the price and people will have to pay it. I personally don't see how someone can drive something that gets less then 25MPG. We've got a Dodge mini-van that get's 30MPG and I still want to trade it in on a Hybrid Car that'll get 50MPG. OPEC has us by the balls because we let them grab a hold, if we'd get more fuel efficent cars on the road then we wouldn't need their damn oil so much and we could tell them to kiss our ass with their $40 bucks a barrel prices.
Link Posted: 5/10/2004 10:10:46 AM EST
The liberals & Dems are in a quandary? Do they want cheap oil or do they want to clean up the environment, or is the war in Iraq & Afghanistan over cheap oil? All of those folks are just a bunch of whiners. They are responsible for all of this stuff.

87 octane $2.17-$2.27, 89 octane $2.27-$2.37 San Gabriel Valley Kali-fornia, 10 miles east of L.A.
Link Posted: 5/10/2004 10:11:23 AM EST
Don't like gas prices, buy a car that minmizes fuel usage.

It's funny how we Americans are SO averse to someone telling us what we should/shoudn't drive, after all we are a free country. We quickly turn socalist when fuel prices go up and cry for government intervention/oversight.
Link Posted: 5/10/2004 10:12:59 AM EST
You know this whole thing is a double edged sword. When the price of oil soars, the auto industry traditionaly takes it in the ass and it is our largest industry in the US that's between the auto companies and those who supply to them. Unemployment in the manufacturing states goes sky high. While inflation on everything that is shipped via truck follows the trend. Once it reaches a magic number, then our own oil reserves become profitable to harvest again and the oil industry picks up.

In short, everyone in Detroit is out of work, all of us pay more for everything, while all those in oil producting states have more jobs.

.....and we thought we were the masters of our own economy?

$5 says Opec won't let the magic number be met.

Link Posted: 5/10/2004 10:22:07 AM EST
Cost me $56 to fill my SUV up with premo yesterday. I'll gladly pay that, in fact I'd like oil to go wayyyyy up. I guess the money I make off my oil wells just gets put back in my gas tank, so basically I really don't care how much oil costs. It all evens out in the end
Link Posted: 5/10/2004 10:24:37 AM EST
Sweet . More cash for me come October.
Link Posted: 5/10/2004 10:26:21 AM EST

Originally Posted By oubeta:
Cost me $56 to fill my SUV up with premo yesterday. I'll gladly pay that, in fact I'd like oil to go wayyyyy up. I guess the money I make off my oil wells just gets put back in my gas tank, so basically I really don't care how much oil costs. It all evens out in the end

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