Dear Constituent...

May 15, 2006
Permission is granted for reproduction by any US congressperson for use in response to inquiries about fuel prices.

Permission is granted for reproduction by any US congressperson for use in response to inquiries about fuel prices.

Dear Constituent:

Thank you for your letter expressing frustration over the high price of gasoline and asking what I plan to do about it. I share your concern about prices that are, by any standard, high. While I appreciate your confidence, I consider it vital to avoid acting for action’s sake and to identify areas where government can act constructively in relation to energy markets, as well as areas where it cannot. An analysis of why gasoline prices have risen can help us make the distinction.

Reasons for prices to be high are clear. Some relate to the price of crude oil-the raw material of gasoline and other oil products-and some have to do with the costs of making and distributing gasoline itself. Concerning the former, the price is determined by the international market, in which demand growth in recent years has outrun expansion of the world’s ability, or capacity, to produce crude oil. The result is shrunken spare capacity, which the market needs for protection against surprise supply losses and surges in demand. Every new fear about supply loss thus stimulates the buying of oil for storage and raises the price of crude.

Adding to high crude prices are extraordinary problems in the US gasoline market. Last year’s hurricanes continue to hamper refinery operation and limit gasoline output. At the same time, the costs of making gasoline have been rising because of requirements for reduced sulfur content and a sudden but necessary and costly shift by refiners from one oxygenating gasoline additive (methyl tertiary butyl ether) to another (ethanol).

These developments in the crude oil and gasoline markets are well documented and amount to sound reasons for gasoline prices to be at current levels. They also dispel sinister speculations you may have heard, such as:

  • That high oil company profits prove that oil companies are setting the price of gasoline at excessive levels. No company or even manageable group of companies controls enough of the market to exert that type of influence. Profits are elevated primarily because oil prices are elevated for the reasons outlined above. The numbers for the biggest companies are very large because the companies themselves are very large. The companies must be large if they are to make the huge, risky investments essential to future oil, gas, and other energy supplies.
  • That the Organization of Petroleum Countries is pushing up the price of crude oil. OPEC can raise the crude price only by holding supply off the market. The perilously low level of idle production capacity shows it not doing so. In fact, important OPEC members such as Saudi Arabia, Kuwait, and the United Arab Emirates are adding production capacity in response to high oil prices and expected future requirements for crude oil.
  • That I or anyone else in government can influence the price of gasoline. Actually, because the market sets the price of crude oil and petroleum products, our influence is mostly negative-the mistakes we occasionally make, such as raising the costs of fuel manufacture unnecessarily and restricting domestic supply.

I am confident that the market will restore oil prices to comfortable levels by moderating demand and generating new supply, including supply from the nonpetroleum sources that we all know must contribute to future energy supply. History shows that letting the market make these adjustments is the best course. My plan for addressing high gasoline prices, therefore, involves the following:

  1. To resist political efforts to make the government dictate energy choices.
  2. To refrain from punishing, with extra layers of taxation, undue regulation, or forced divestiture, the companies responsible for future oil and gas supply.
  3. To call for a review of how past government actions, or failures to act, may be interfering with the market, adding to fuel manufacture and distribution costs, or limiting supply.
  4. To seek whatever corrections may be in order.

Thank you again for writing.

Sincerely,