Gas Prices, A Major Campaign Issue? Any Possible Solutions?

Part 1

With gas prices rising at exuberant rates experts say that this may be the sleeper. Sleeper in that this issue may make or break one of these candidates in November. But before we examine the position of both candidates we need to first explore why prices at the pump are so high and what exactly we are paying for. There are many claims that oil is expensive because of the "big oil companies" but what exactly are they doing, or not doing, that is causing the fuel to be this high? Attention to off shore drilling has made its way to the forefront of both campaigns in an effort to prove that we have plenty of oil here in the U.S. If this is the case then why aren't we drilling and using our own resources? And yet there was another policy of relief offered in the past by Senator McCain. That policy would be to repeal the gas taxes for the summer to give the American public some relief. But is this idea going to be all that great? It seems that the answers to these questions are complicated and a simple "yes its big oil's fault" or "yes we should be drilling" is not sufficient to answer these questions.

First lets examine how the price of gas is determined at the pump. According to fueleconomy.gov, the breakdown in May for a gallon of regular was as follows: 75% of the price per gallon is due to the price of crude oil, 10% is due to the process of refining, distribution and marketing costs 5%, and 10% of the price is due to the tax imposed by the government. The breakdown in May for Diesel was: 64% for the price of crude oil, 21% for the refining, 5% for the distribution and marketing, and 10% on taxes.[1]

According to The Quarterly Journal of Economics, price increase of crude oil directly affect the retail gasoline prices (what we pay at the pump), while a hypothetical decrease in crude oil would not have the same effect.[2] This paper was published in 1997 yet this idea holds true to the present. The asymmetry seen here is seen in many different markets and can be used not only for oil. Sam Peltzman at the University of Chicago writes in his article Prices Rise Faster than they Fall, he explains that positive shock to prices in many markets is twice as influential than negative shock.[3] That means that overall the theme seen with markets is such that it takes twice as long to offset positive shock (increases in prices) hence the reason retail gasoline has increased so quickly and inferring that prices would not be reduced anytime soon. So is this the dead end that it sounds like? Part 2 will discuss the possible solutions and see if any are truly realistic.

References

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[1] http://tonto.eia.doe.gov/ask/gasoline_faqs.asp#gas_prices

[2] Borenstein, Severin, A. Colin Cameron, and Richard Gilbert. "The Quarterly Journal of Economics." The Quarterly Journal of Economics 112 (1997). Abstract. Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes? (2006): 305-339

[3] Peltzman, Sam. "Journal of Political Economy." Journal of Political Economy 108 (2000). Abstract. Prices Rise Faster Than They Fal