Could Michele Bachmann Really Bring Back $2 Gasoline?

Earlier this month, Republican presidential hopeful Representative Michele Bachmann boldly declared, “Under President Bachmann you will see gasoline come down below $2 per gallon again…That will happen.”

She suggested she could achieve this goal by allowing more aggressive U.S. oil drilling in both Alaska’s Arctic National Wildlife Refuge and offshore.

On the surface, Bachmann’s claim seems fairly ridiculous given current gas prices. That said, would it actually be possible for a President to achieve less than $2 per gallon gas?

In today’s world, there are two types of people: leaders chosen for their charm and good looks, and those who actually have to carry out their ridiculous policies. In this post, I will put myself in the position of someone who would have to “make Bachmann’s policy happen.”

To tackle this problem, the first question any competent policy analyst would ask is: what are the main components of the retail price of gasoline? It turns out, the good people at the U.S. Department of Energy’s Energy Information Administration have already answered this question.

Source: U.S. Energy Information Administration

The largest component of cost is crude oil, which represented about 68% of the price of one gallon of regular gasoline in 2010. Finding a way to lower this price would be a major goal of any policy. The second largest component are taxes. Federal excise taxes are currently 18.4 cents per gallon, and state excise taxes averaged 22.06 cents per gallon at the beginning of 2011. The third and fourth largest components are distribution and marketing expenses, and refining costs.

The second component is the easiest to fix. President Bachmann could simply propose a bill repealing gasoline excise taxes, and provided she had a majority in Congress, she could wipe out 18.4 cents per gallon with one stroke of a pen. Getting at the other 22.06 cents would not be as easy. That said, the federal government could withhold state funding to “nudge” states who refused to cut their gasoline excise taxes.

With a stroke of a pen, and some political arm-twisting, gasoline prices are now 40 cents cheaper. That said, gasoline prices averaged $3.55 during the week of August 22. Cutting gasoline excise taxes brings gasoline prices down to $3.15. Now what?

The next component to tackle is clearly crude oil prices. Bachmann’s solution of more drilling would certainly help lower these prices, but not in the near-term. It takes some time to get new production capacity on-line. Furthermore, average fuel prices would have to still drop by $1.15 to get to two dollars. Crude oil spot prices were an average of $85.36 per barrel the week ending August 19, implying $2.03 per gallon of oil content for gasoline. To cut this number by $1.15, oil spot prices would have to decline to just over $37 per barrel.

Adding additional spare capacity might help, but would not likely push spot oil prices down that low, that fast.

But if Representative Bachmann remained determined to lower prices, the surest way to do it would be to ask the Fed to tighten the U.S. money supply by raising bank reserve requirements and selling treasury securities. Since oil is denominated in U.S. dollars, the effect of these policies would have to result in a dollar appreciation of more than 130%.

Of course, these policies would cause interest rates to soar, savings rates to increase, and the U.S. economy to lurch into a recession.

Details, details….

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About Sean Patrick Hazlett

Conservative clean energy crusader, national security hawk, financial analyst, engineer, and former military officer.
This entry was posted in Business, Clean Energy, Clean Tech, Energy Security, Finance and Economics, Peak Oil, Policy, Politics, Taxes, Technology and tagged , , , . Bookmark the permalink.

6 Responses to Could Michele Bachmann Really Bring Back $2 Gasoline?

  1. Chris Van Trump says:

    Maybe she’s a big believer in Joule Unlimited?

  2. Ann says:

    Now Now … lets think outside the box. Michele did include Natural Gas and coal in her expansion plans did she not? If an “Open Fuel Standards” bill was passed which allowed flex fuel vehicles to use feed stocks of natural gas,, coal, algae biofuel, biomass or other unsubidized bio fuels in a competitive open fuel marketplace then $2 GAS (fuel) could be achieved now. Industry analysts (think Celanese Chem) state fuel can be produced on a mass scale now for under $2 using Natural Gas or Coal as input feed stocks, and biofuels may be getting there soon. If BRAZIL can achieve much lower fuel prices and energy independence in a competitive flex fuel environment, surely the U.S. can as well ?

    • Ann,

      Of course there are substitutes today for gasoline for under $2 per gallon. The problem is that you also have to build out infrastructure to support these fuels. For instance, algae is used to produce biodiesel. The problem is that few cars in the United States run on diesel. Natural gas also requires filling stations to convert to dispensing natural gas and requires consumers to either buy new cars or use conversion kits to change their current ones, which may violate the warranty. Therefore, any such conversion would likely take 8-10 years for widespread adoption, a time spam well beyond one or two presidential terms.

  3. Alec Sevins says:

    The larger question is WHY would we want gas to be that cheap, considering that price is the only thing that makes most people conserve oil in the first place. Isn’t conservation a good thing? Isn’t “conserve” part of the word “conservative?”

    But no, today’s Republican Party is more about gluttony and the perception that nature owes Man cheap energy via supernatural decree. Roscoe Bartlett and Vern Ehlers are the only major Republicans I’ve heard talking about limits to physical growth and energy consumption.

    And then there’s the problem of excess CO2 from excessive oil consumption (which low prices would result in) causing global warming. But Bachmann is too clever to fall for that “hoax,” or Peak Oil (we peaked in 1970), or much of anything based on evidence.

    • Alec,

      Thanks for stopping by. I assume you mean the US reached peak oil production in the 70s (the world may or may not have reached peak oil in the first decade of the twenty-first century).

      I agree that Americans should be aggressively finding alternatives to fossil fuel. That said, we will never get there if fuel prices remain persistently high, as the cost of oil will pull money away for capital investment and harm the economic recovery necessary for investment in clean energy technologies. It is always better to have a smooth transition than it is to have a violent one.

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