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The price of gasoline is soaring — regular gas has hit an average $3.72 nationally according to the Energy Information Administration, and prices have already climbed well beyond $4 a gallon in California, Alaska and other pricey locales.
On average, consumers pay over 20% more for gasoline than they did a year ago. Skyrocketing gas prices are putting some serious hurt on drivers’ wallets, and throwing politicians, car makers and others into full-blown panic.
As a result, we’re hearing some ideas on how to ease the pain at the pump. Quite honestly, some of them are so ridiculous they don’t pass the horse-sense test — in fact; some are so dumb they could have fallen out of the wrong end of a mule.
Nevertheless, the following three ideas are getting a lot of play in the press recently. Let me show you why proponents of these bad ideas aren’t dealing with a full deck.
Bad Idea #1 — Gas Tax Holiday
Two presidential candidates, Hillary Clinton and John McCain, are pushing to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for this summer’s travel season. Even if it doesn’t become a reality this year, this kind of bad idea will probably come back next year. Why? Because the idea of a tax holiday actually seemed to help Clinton with voters in recent primaries.
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| Despite the negative ramifications on jobs and Federal Highway Funding, Presidential candidates Hillary Clinton and John McCain support suspending the federal excise tax on gasoline this summer. |
Never mind that such a tax holiday would mean a loss of $8.9 billion in Federal Highway funds … or the loss of 310,750 jobs (people working to maintain and build our highways). The problem is that oil companies will probably gobble up most of any tax cut. Plus, without a change in drivers’ behavior, prices will probably continue to trend upward.
And even if the entire tax cut is passed through to consumers, the savings to motorists would be peanuts! For the average motorist, driving approximately 12,000 miles per year, suspending the gas tax would result in a savings that would amount to a measly $28.
If you want to see how much you would save, try this handy gas tax holiday calculator: http://tinyurl.com/5r4olv.
Bad Idea #2 — Chrysler’s Gas Price Gimmick
Chrysler is offering new customers who buy a Chrysler, Dodge or Jeep a fuel card that will lock their gas price at $2.99 a gallon for three years, in lieu of a standard rebate. For some models, there is a gas card AND a rebate — $3,000 back on the Chrysler PT Cruiser, Dodge Charger, Jeep Grand Cherokee, Dodge Dakota and Dodge Ram. What do all these vehicles have in common? They all suck … gas!
First of all, how desperate must Chrysler be to try this ploy? Pretty desperate — its sales dropped 23% in April and Chrysler cars get the lowest average mileage of any of the major automakers. Chrysler only has one compact car in its fleet and it makes no subcompact cars.
Second, this gas gimmick will really only be worthwhile for most cars if the price of gasoline goes much higher — to $4.60 a gallon or so. While I think gasoline prices could get there eventually, they aren’t there now.
An important point is you don’t get unlimited gas for $2.99 a gallon — just enough to drive about 12,000 miles a year, based on the EPA fuel estimates. If you drive with a heavy foot you aren’t going to get near the car’s official fuel estimate.
The fact is, you’re probably better off just taking the bigger standard rebate. According to the website “Common Sense With Money,” even if a car gets 28 mpg, gasoline would have to cost $4.94 per gallon for the deal to make sense.
Bad Idea #3 — Drill in Alaska Wildlife Preserve
I hear from readers and others that if it weren’t for polar-bear hugging environmentalist wackos, we could solve our energy problems by drilling in the Arctic National Wildlife Refuge (ANWR).
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It is true we already do get oil from remote Alaska — Prudhoe Bay accounts for 17% of U.S. domestic production. What’s more, since the U.S. produces 5 million barrels of oil a day, if we could pump an additional 1 million barrels from ANWR it would represent a 20% increase in domestic production.
However, even the most hell-bent-for-leather program would require exploration, test wells, building of infrastructure and more. It would probably take about 10 years for oil from ANWR to start reaching consumers. I think we’ll either be well on our way to electric cars and trains or a Mad Max-esque dystopia by then. In other words, ANWR isn’t a short-term solution to high gasoline prices.
Also, we don’t know the size of the recoverable oil reserves in ANWR. Estimates vary, but the mean recoverable estimate is 7.7 billion barrels. That sounds like a lot … when you’re talking about olive oil. The U.S. uses 20.6 million barrels of petroleum per day. So, the recoverable reserves in ANWR would give us 373 days of supply, or slightly over a year.
And it wouldn’t be cheap — far from it. ANWR defines “remote,” and the winter conditions in ANWR could pretty much be described as “an icy slice of hell.”
Finally, there’s no guarantee that the oil would go to the U.S. Some Alaskan oil now goes to Japan — oil companies can sell to whoever they want.
So What Can We Do? What Should We Do?
All these problems and obstacles aside, I’d be willing to consider drilling in the ANWR if — and it’s a big if — we first made a serious effort to conserve the energy America uses. Conserve, conserve, conserve. It should be our #1 priority.
Americans use three times the amount of energy per capita as Europeans and 10 times the amount of energy per capita as people in emerging markets.
I’ve laid out the case for why we need to roll the national highway speed limit back to 55 mph and push telecommuting. If you want good ways to save on gas bills and improve your mileage, see my recent Money and Markets columns on 7 Things You Can Do to Prepare for $200 per Barrel Oil and How to Get Cheap Gas.
Here are some more ideas that might work …
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| Metrorail, or simply Metro, is the rapid transit system of Washington, D.C., and neighboring communities in Maryland and Virginia. Public transportation is vital to the area’s workforce and tourist trade. |
Promote public transportation. Ridership on America’s buses and trains is already up, year over year — but not much. Americans took 10.3 billion trips on public transportation last year, up 2.1% from 2006. Transit managers are predicting growth of 5% or more this year, the largest increase in at least a decade.
In my own neck of the woods, the South Florida Regional Transportation Authority, which operates a commuter rail system from Miami to Fort Lauderdale and West Palm Beach, posted a rise of more than 20% in rider numbers recently.
We need to do a lot more of that. Other programs we should be doing include wiring buses and trains with free internet connectivity, a nationwide push to build as much light urban rail as possible and car sharing programs. These will all help get us there.
We need to raise taxes on things we want to discourage. I’m talking about gas-guzzling cars. I think a sliding tax scale that rewards people for buying gas-sipping compact cars and socks them in the wallet for buying big, fat SUVs is the way to go. That idea is probably going to get me more hate mail than ever. Bring it on!
On the other hand, we need to give tax breaks on things we want to encourage. Did you know that Congress is still fighting over whether to renew the investment tax credit for solar energy and the tax credit for wind energy? How much of a no-brainer is that?
Nearly one-third of all U.S. power capacity added last year — about 5,244 megawatts — was in wind. Overall wind-generating capacity soared 45 percent last year, adding the clean-energy equivalent of 10 large coal-fired power plants, according to the American Wind Energy Association (AWEA).
And a U.S. Energy Department report says that wind turbines could produce a fifth of the United States’ annual electricity needs within about two decades.
Sure, gasoline powered cars can’t run on wind or solar — but electric cars can run on the power generated by alternative energy. I think we’ll be making the shift to electric cars sooner rather than later if oil and gas both continue along their upward trends.
And that brings us to the big question on everyone’s mind …
WHICH Direction are Oil and Gas Prices Headed?
I expect both oil and gas prices to be very volatile. We may not have seen the highs in oil this year, but we may not have seen the lows either.
What could drive oil prices lower? To start with, people are already conserving and changing their energy choices. For example, just in China …
- Chinese crude oil imports dropped 3.9% in April from a year earlier.
- China’s auto sales only grew at an 11% rate in April — half the rate of a year earlier.
But there’s bad news, too. While oil production in the Middle East is steady, Mexico’s oil production is falling steadily lower (Mexico is America’s #3 supplier of imported oil) and Russia’s oil output decline is likely to continue. And just yesterday, Iran announced that it may cut back on its oil production, probably by 400,000 to 1 million barrels per day.
So, prices should trend higher, but as I said, they’ll be very volatile. When prices go lower, people will likely go back to their old ways, using more oil and driving prices back up again. It would take real political leadership to push America down the path to energy conservation. And I don’t think we’ll find that kind of leadership in an election year.
In the meantime, I suggest you …
Fill Your Tank With These Winners!
The United States Gasoline Fund (UGA), which aims to track the price of reformulated gasoline futures, is the easiest way to ride gasoline prices higher. You might consider buying that on a pullback.
Also, the iShares Dow Jones US Oil & Gas Exploration and Production ETF (IEO) holds a bunch of companies that should do very well as the price of oil climbs higher — companies like Occidental Petroleum, Devon Energy, Apache Corp and EOG Resources.
Yours for trading profits,
Sean
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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