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The Four Biggest Lies About Gas Prices

Every time gas prices begin to climb upward, the U.S. begins a massive exercise in collective ignorance. Folks forget the rules of supply and demand, ignore the role of speculators and begin grasping for reasons and solutions that simply don't make sense. You can usually find politicians and others who stand to benefit feeding the flames.

So the next time you hear someone railing about the price of gas, bear the following ideas in mind:

1. Obama is causing gas prices to rise
Obama isn't the first president to be blamed for rising gas prices, and he won't be the last. Sarah Palin joined the political theater fray last month -- as if she ever left -- touting "evidence of the President's anti-drilling mentality and his culpability in the high gas prices hurting Americans." Her chief complaints center on drilling (see Lie No. 2) and taxes. In Palin's head, if tax breaks end, oil companies will turn tail and run from their exploratory projects.

Here's the thing: High taxes or not, these companies are in the business of finding and producing oil. Even without incentives like tax breaks, Exxon isn't going to suddenly start selling pizzas. The cost of doing business may rise, but they won't leave.

Gone are the days of easy-to-access oil. Which leaves U.S. and international oil majors with these choices: Work in technologically complex areas like the deep waters of the Gulf of Mexico; in costly areas like Canada's oil sands; or in politically unstable regions that ooze with protectionist measures.

2. Domestic drilling will lower gas prices

The U.S. could open up every offshore area to drilling and it wouldn't impact gas prices tomorrow, next week or even next year.

Plus, commercially viable domestic resources in the U.S. aren't enough to meet our daily demands. The U.S. government estimates there are 18 billion barrels of oil in the outer continental shelf of the lower 48 states that are off limits to development. Blogger Robert Rapier, who tackles this issue in great detail, puts it this way:

That may sound like a lot, but it is only about 2.5 years of supply for the United States, and it would take several years to allocate leases and drill exploratory wells. Even if the estimated 10 billion barrels of oil in the Arctic National Wildlife Refuge were available for development, today's policy decisions would have no impact on gasoline supplies for as much as a decade.
3. Releasing oil from the Strategic Petroleum Reserve will lower gas prices
This is, quite frankly nonsense. The U.S. Strategic Petroleum Reserve is a 727 million-barrel oil reserve. That would last the country 38 days or so. This is a drop in a very large bucket and is designed to buy us a little bit of time during a supply emergency.

So, let's say we use that oil. Gas prices won't fall. But it would put us in a precarious position. The government, which will have to buy oil to refill the reserve, could be end up paying more if prices rise.

4. Speculators aren't a real factor

The price of oil is determined by the relationship between available supply and demand; and in part by the producers and refiners.

But prices are ultimately set in the markets, where some 85 million barrels of oil a day are traded. When protests erupted in Libya, oil prices rose. Not because the country is a big enough supplier to have a meaningful effect on gas prices. The market reacted to the prospect of unrest spreading throughout the Middle East, which would have a significant impact to the U.S. and the rest of the world.

Enter the speculators. As BNET blogger Alain Sherter noted last month, there's plenty of research that shows speculation by hedge funds and other investors raises the cost of gas. And yet, politicians waver at taking any real action.

The Commodity Future Trading Commission released a report last month that provides evidence for all of those naysayers. The data shows a huge proportion of traders, who are not suppliers or refiners, are holding long positions. CFTC Commissioner Bart Chilton said last month that since June 2008 the number of energy contracts held by such investors has risen 64 percent.

This means that a record number of speculators are betting that the price of oil will rise, and thereby driving an increase in gas prices.

Photo from the NOGA; Flickr user alan cleaver, CC 2.0; and the White House
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