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.
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.