Pumping Up

Fuming over oil prices.


Harried motorists across the nation, especially California, have been wondering all spring: Why are gasoline prices so high? Pump prices, Business Week alerts us, are "near all-time highs even though the peak summer driving season is months away." As of early April, the national average was $1.76 per gallon, and in California pump prices below $2 had been a fond memory for well over a month. Both drivers and politicians were scrambling to finger culprits in this supposed plunder at the pumps.

Gas prices actually are nowhere near an "all-time high." In inflation-adjusted terms, gas prices were last this high in 1985 but were consistently this high or much higher until the late 1960s. Prices have been consistently lower than they are today only in the past two decades, a golden age of cheap, abundant crude—even as we drowned in conservationist warnings that the ground was running dry.

Chinese demand is growing at an unprecedented rate, and refineries are near capacity with healthy margins. But many of the factors affecting gas prices in America are more political. Just since 2002, the dollar has fallen more than 40 percent against the euro, and a weak dollar means that oil sellers must raise the dollar price of each barrel to make the same amount in real terms.

Once that OPEC crude gets to America, it faces a national market balkanized by varying government mandates for reformulated gasolines that make price spikes in one area, such as California, immune to amelioration from outside sources. Later this year, when New York and Connecticut adopt their own ethanol standards, expect their supply and price situations to become as dire as California's. California Gov. Arnold Schwarzenegger has begged for relief from federal reformulation mandates, but President Bush has not reacted. (California is bound to go Kerry anyway.) And the feds continue buying high and not selling at all, siphoning oil from the current market by filling our strategic petroleum reserves at 20-year-high prices.

The Federal Trade Commission has tried to blame illegal collusion among oil companies for the recent high prices but found no evidence, and California's attorney general is investigating Shell's plan to close a Bakersfield refinery, suspicious that it's an attempt to squeeze supplies and raise profits. Meanwhile, federal and state taxes still amount to around 25 percent of the pump price for gas—more than refinery margins most places.