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CENTRAL VIEW for Monday, March 12, 2012

by William Hamilton, Ph.D.

Gas pricing: The reality

As we suffer from much higher gas prices at the pump, many unfounded rumors swirl around as to how the price of auto gas at the pump is established. Basically, it is simply the Law of Supply and Demand. (But first, fair disclosure: Every few months my brother and I receive checks for about $30.00 from an oil company for drilling on Oklahoma land where we own a fraction of the mineral rights.)

Crude oil, irrespective of where it comes from, is a global commodity and, as such, is traded across the global commodity market -- just like wheat, corn, or cattle futures. The global market price for crude oil is based on the amount of crude oil that is up out of the ground and in transit by sea, by 18-wheelers, in the pipelines, in storage tanks, and at the oil refineries.

Based on fairly accurate knowledge of how much crude oil is up out of the ground, the world price for crude oil is established. When the supply goes down, the price goes up. When the supply increases, the price goes down.

The radical environmentalists spread the rumor that the U.S. exports oil to other countries and, therefore, does not need to increase its domestic oil production. Actually, the U.S. is a net importer of crude oil. In short: we import far more crude oil than we are producing.

Nevertheless, we do export a small amount of “refined” oil products to other countries. Here’s why: Our oil refineries are designed to produce far more unleaded gasoline than diesel fuel. So, the reason diesel fuel is so much higher in price now than auto gas is because the supply of diesel fuel is so limited compared to the supply of unleaded auto gas. Higher diesel-fuel prices translate to higher prices for food and for all consumer goods.

While we do export a small amount of auto gas and other refined-oil products to Mexico and Canada, we do so in exchange for more diesel fuel for our trucking fleets and for other consumers of diesel fuel.

Due to the radical environmentalists, we have not built a new oil refinery in this country in 40 years. If the Obama Administration would allow them, new refineries would be designed to produce as much diesel fuel as auto gas. Unfortunately, to reconfigure our current refineries would be prohibitively expensive.

As for our abundant coal reserves, in 2008, Candidate Obama told ABC News that he plans to tax our coal-powered plants into bankruptcy and use the taxes collected to develop alternative energy sources.

Another rumor: Big Oil gets big tax breaks. According to the Congressional Budget Office, the tax preferences for all fossil-fuels amount to $2.5 billion per year, enough to run the U.S. government for about six hours. Renewable energy gets 68-percent of the tax breaks, fossil-fuels 15-percent, and nuclear energy four-percent. Twelve percent goes to energy efficiency incentives like Mr. Obama’s favorite $50.00 light bulbs, Solyndra solar that gave $370,000 in bonuses to 20 executives and went bankrupt, and the $250,000 per car subsidies for the failed Chevy Volt.

According to the Institute for Energy Research, the U.S. is sitting on about 1.4 trillion barrels of oil. Per the Heritage Foundation, that’s enough oil to power every car in America for 430 years. If the Obama Administration would allow more domestic oil production, we would have no need to be involved in foreign wars to protect the flow of oil from the Middle East and we could have a more peaceful planet.

Nationally syndicated columnist, William Hamilton, was educated at the University of Oklahoma, the George Washington University, the U.S Naval War College, the University of Nebraska, and Harvard University.

©2012. William Hamilton.

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Dr. Hamilton can be contacted at:
P.O. Box 2001
Granby, CO 80446

Email: william@central-view.com

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