Cheap Gas Is a Bad Habit

Cheap Gas Is a Bad Habit . . . for Whom?

Mr. Samuelson believes gas prices being low is bad. I agree. He proposes more gas taxes. I agree. I disagree about why. Gas taxes need to be higher only because we need new highway construction (at least here in Indiana, and I suspect many other places).

The problem is that Mr. Samuelson wants to keep people out of certain cars. That may be the result of high taxes, but it will worsen the problem that he proposes to remedy: our dependence on foreign oil.

If the cost of gas has nothing to do with the cost of exploration and development, higher taxes might increase our dependence on foreign oil.

If I am an executive at Exxon, I want to maximize profits. That means find or buy oil cheap and sell it for a reasonable mark-up. Reasonableness is important because I want to sell many gallons of gas to each customer. If I economically rape the customer, he won't come back. For example, if I make 5% on a $2.00 gallon of case, I will get 10 cents for each gallon. SUV's may have 30 gallon tanks (I don't know. I don't own one.) That's $3.00 per fill up. If that customer comes to me every week, that is $150 (assume a couple slow weeks, too) per year for one vehicle.

If I make 20% on a $2.30 gallon, I may get $12.00 one time, but will I get the customer the rest of the year? Not if my competitors beat my price.

If the oil companies want to make money, they have to keep oil flowing. If the price of gas gets to be high based on taxes and my oil company will not stand to make more money from the increased prices, my profits will not go up. I have no incentive to produce more oil. Only the cheapest producers keep tapping wells. But let's hold that thought a moment.

Here is the clincher: the cost of production for a barrel of oil is not equal in all locations. It is cheapest in the Middle East (about $5) and most expensive closer to home (e.g., Colorado or Canada at around $20). As I understand it, most of those costs are in the capital investment and not in the on-going opeations of the production facilities. So if a price rises over a period of years, more production facilities will become cost effective. If my oil company was getting the profits from the increased prices, guess what happens? Our dependence on foreign oil (or at least OPEC oil) decreases!

Now let's revisit the gap in price for oil versus the price of taxed gas. We already concluded that only cheap producers tap new wells. That means that OPEC will be the only ones that benefit. The worst possible situtation for OPEC is to have new competitors, because that allows OPEC greater opportunities to violate the cartel's rules, thereby lowering prices.

If we want less foreign oil, American oil companies need greater profit. Why do you think that these proponents want higher taxes? That's another article.