The Politics Of Gas Prices

by: Pacifica Partners

History has shown us that U.S. presidential election cycles too often become fixated on a single issue or phrase that defines the election. In the 1980 election it was Reagan's "Are you better off than you were four years ago?" and in 1992 the Clinton campaign was able to define the election around the phrase "It's the economy stupid." In the current election, one of the hot button issues seems to be the price of gasoline.

OPEC and Crude Oil PricesClick to enlarge
(Click to enlarge) Chart Source: Bloomberg

While the price of gasoline is a serious economic issue that has the potential to slowdown the budding recovery, the solutions and rhetoric are not matching the importance of this issue. On the Republican side, the solution most often heard during the primaries was rooted in the idea that there had to be more drilling which would increase the supply of oil. In theory, this new found supply would lead to lower gas prices. On the Democratic side, President Obama believes that conservation and alternative energy sources will help to alleviate the high price of gasoline.

Ethanol was thought to be a solution but it has proven to be a solution that comes at a cost. Many opponents think that ethanol is bad for the environment and it amounts to putting food into a gas tank since about 90% of US ethanol production comes from corn. Another problem with ethanol is that it cannot be shipped over long distances. This is another example of what passes for a solution on the campaign trail often fails to hold much water in the "real world".

More drilling in the U.S. will not lead to lower gas prices. The high price of gasoline has very little to do with the oil supply. In fact, when it comes to oil, supplies have seldom been more plentiful. The Oklahoma oil storage and pipeline facilities are filled to capacity with oil - much of it being Canadian tar sands oil, OPEC is doing its best to keep production up -- despite the popularly held belief that OPEC is responsible for oil prices being at current levels -- and U.S. oil production is rising.

The reality is that it isn't a scarcity of oil that is leading to higher pump prices but a bottleneck in the refining. It might be surprising to some but oil from western Canadian oil fields sells for a hefty discount because of this supply bottleneck.

As the data in the chart above show, drilling activity as measured by the number of active drilling rigs, has been running at a very strong pace in the U.S. and Canada. Furthermore, U.S. oil production has rebounded far stronger than most any expert would have thought possible even just a few years ago. Yet, gas prices have risen.

Gasoline prices are being impacted to a large extent by the fact that the U.S. refining industry has been undergoing structural change for some years. Refineries in the eastern U.S. are being closed down as they are unable to produce gasoline at a profit. Surprising as this might sound given the pain being extracted at the gas pump, not all refineries are profitable under current market conditions.

The reasons for high gasoline prices are complex and cannot be solved with slogans in 30 second television ads or bumper stickers. Both parties owe the voters some straight talk so that real solutions can be evaluated and implemented.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.