5 myths about gas prices, Big Oil, and the presidency
Our national discussion on uncomfortably high gas prices is filled with exaggerations and distortions. It's time we wised up
When it comes to presidential elections, gas prices aren't as important as you think. Sure, they're a relevant data point, but a study by Yale economist Ray Fair shows that dating back to 1948, there is little correlation between election results and your pain in the gas.
Take 1992. Gas prices were at their lowest levels in decades. The economy was pulling out of a recession. And the president had just won a war in convincing fashion. What happened next? Voters gave President George H.W. Bush the boot.
Fast forward to 2004. The economy was again pulling out of a recession — but gas prices were at their highest levels in decades. What happened next? President George W. Bush was re-elected.
The view that gas prices are the end-all, be-all data point in an election year is plainly a myth.
Say what? One president loses when prices are at record lows ($1.77 in today's dollars for Bush Sr.), but another wins when they're at a multi-decade high ($2.26 for Bush Jr.)?
Fair's study shows that the critical factor isn't gas prices themselves, but the sense Americans have (or don't have) that the economy is getting better. Today, Americans believe things are getting better. The unemployment rate has fallen for five straight months. The rate of economic growth is picking up. Consumer confidence is on the rebound. This bodes well for the president — for now.
Of course, gas prices are one part of this overall perception. (What other product's price is so obviously in your face every day?) And if per-gallon prices pass the psychologically critical $4 level, which they likely will very soon, expect a drumbeat of stories and sound bites from folks saying how tough things are. But here's the real danger for Obama: If gas prices rise long enough and high enough, they will hurt economic growth — and his fortunes in November. But with eight months to go, and at $3.71 a gallon, they are not enough — again, for now — to outweigh the larger sense that things are improving.
The view that gas prices are the end-all, be-all data point in an election year is plainly a myth. And when it comes to oil and gas, there are plenty of others. Here are five:
1. Gas prices rise every summer because oil companies gouge usIt never fails. Just as the summer temperatures rise, so does the price at the pump. What a rip-off... or is it?
Most Americans don't know that gas is made of different ingredients in winter than in summer. In winter, a cheap additive, butane, makes it less expensive to fill 'er up. But in hot weather, butane evaporates. Refineries must replace it with other, more expensive ingredients. So blame chemistry, not conspiracy, for higher summer prices. This didn't keep a wily politician like Obama from blaming Bush when prices soared four years ago — and it certainly hasn't kept Republicans from blaming Obama now.
2. We get most of our oil from the SaudisNewt Gingrich says that if he becomes president, he'll never bow to Saudi Arabia. The implication, of course, is that we're heavily dependent on Riyadh for oil. That's not quite right. Gingrich "the professor" knows full well that our top suppliers are Canada and Mexico. For national security and economic reasons, U.S. oil supplies are well diversified.
3. Oil companies rake in obscene profitsDemocrats, including the president, blame Big Oil when prices rise. Last week in Miami, Obama said oil companies "have been making record profits off the money you spend at the pump."
This is deceiving. Obama is right that ExxonMobil, Chevron, and all the rest make huge profits in absolute terms. But in relative terms — relative to the size of these global behemoths — their profit margins are relatively modest. I ran a database on average net profits over the last decade. A cross-section of well-known American companies showed profit margins higher, in some cases much higher, than Big Oil: Boeing, McDonald's, Disney, Apple, and many others, for example. Few Americans complain about the success of these companies. But look at the numbers. Using S&P data, Boeing's average net margin was 19.0 percent, McDonald's 18.8 percent, Disney's 15.9 percent, Apple's 13.5 percent — and Exxon-Mobil's 8.9 percent. Make no mistake: That 8.9 percent means humongous bucks on an absolute basis. But in relative terms, not so much. I'm neither a supporter nor defender of Big Oil, but it's useful to have some added context when discussing complex and often misunderstood subjects.
4. Drilling for oil would solve all of our problems Shortages aren't the problem. Storage tanks in Cushing, Okla., the principal North American trading hub for crude, are overflowing. Oil tankers are actually being rented to store oil offshore because we have nowhere else to keep it. And if we did drill, baby, drill, we couldn't even process the excess oil. Refining capacity has shrunk in recent years. Existing refineries are running near capacity, and the U.S. hasn't built a new refinery in decades. "So just build more refineries," a Twitter follower tells me. Fine: You're already upset about gas costs. Do you want the multibillion-dollar cost of a refinery passed along to you, too? And where will we build it? Not in your backyard, you say? Thought so.
And when oil is refined into gasoline, where's it going? To other countries, where demand is growing at a faster pace than here. U.S. exports of gasoline have tripled in the past year.
5. We must tap into our emergency oil reservesPresident Obama did this last June, remember? Gas had shot up to nearly $4 a gallon amid concern that violence in the Middle East would cause supply disruptions. After we tapped the reserves, gas prices dropped to around $3.20 by fall. Why don't we do the same thing now? The Strategic Petroleum Reserve — which only holds about a five-week supply of oil (727 million barrels, and the U.S. guzzles 21 million a day) — is meant to be used only in a national emergency like a war. And even if Obama did tap the SPR again, we can only process about 4 million barrels a day. And even then it takes several weeks for the gas to make it to market.
Myths, exaggerations, distortions by manipulative politicians, and inaccurate reporting by the media. The American people deserve better on such an important and complex subject.