Gas Price Drop Due to Market, Not Conspiracy, Analysts Say

Randy Hall | Staff Writer/Editor | Wednesday, October 11, 2006

Gas Price Drop Due to Market, Not Conspiracy, Analysts Say

(CNSNews.com) - Over the past few months, the price of gasoline has fallen about 75 cents per gallon because of market forces and not, as some liberals have alleged, because of a secret conspiracy to help Republicans in the upcoming mid-term elections, according to several analysts.

Gas prices, which reached a record national average of $3.06 per gallon on Sept. 5, fell to $2.26 nationwide by Tuesday, Oct. 10, as reported by the American Automobile Association (AAA) at fuelgaugereport.com. The cost of a barrel of crude oil, which peaked at $78.40 on July 14, fell below $60 on Tuesday.

As a result, some political pundits and bloggers have begun raising the specter of "conspiracy," claiming that the trend is being spurred by the coming election. But H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis (NCPA), argued that the theory is "absurd."

"This is basic economics," said Burnett in a news release. "Markets, when not encumbered by foolish legislation to 'fix' a problem, work."

Burnett attributes the recent price drop to three main factors:Increased supply. Previously high prices are bringing more oil to market -- drilling rigs and production are up, refineries are being expanded here and built in other countries for the first time in years, and new technologies are being applied to exploit traditional and non-traditional sources;
Decreased demand. In response to high prices, consumers are conserving. For example, sales of SUVs have fallen, and more fuel-efficient cars are flying off the shelf; andDecreased risk. Tensions in the Middle East have eased as more Iraqi oil is reaching the market, Iran seems unlikely to face sanctions, and Israel has left Lebanon, while the hurricane season has been milder than predicted. Therefore, inventories have remained high.
Ben Lieberman, a senior policy analyst in the Roe Institute for Economic Policy Studies at the conservative Heritage Foundation, agreed with Burnett's reasons for the cost decline and added a few points of his own.

"Ethanol, which experienced a massive price spike after the law requiring the use of this fuel additive took effect early this year, has finally come down in price," Lieberman stated.

Also, "now that summer is over, demand slackens, and the tough seasonal environmental specifications for fuel are no longer in effect," he added.

"Oil may never be $15 or $20 a barrel again," Burnett said. "But absent a significant political crisis, such as OPEC reducing supply, they will continue to fall."

In fact, officials with the Organization of Petroleum Exporting Countries (OPEC) are discussing a plan to cut oil production by about 1 million barrels a day to prevent further declines in the cost of gas.

And even if that doesn't take place, the U.S. Energy Information Agency predicts gasoline prices of $2.55 a gallon by January before they climb again next spring.

Nevertheless, the fact that a significant decline in the price of gas is taking place a short time before the Nov. 7 election has not been lost on a number of political pundits and liberal bloggers.

"You know, if you were a real cynic, you could also wonder if the oil companies might not be pulling the price of gas down to help the Republicans get re-elected in the midterm elections a couple of months away," commentator Jack Cafferty said on the Aug. 30 edition of CNN's "Situation Room" program.

The theory has even become fodder for late-night comedians. "The good news is oil has fallen to $60 a barrel," said Jay Leno during an episode of NBC's "Tonight Show." "Experts predict it will continue to fall until exactly one minute after the polls close on Nov. 7."

Discussion of the conspiracy theory appears to be having an effect. A recent USA Today/Gallup Poll asked voters: "Do you think the Bush administration has deliberately manipulated the price of gasoline so that it would decrease before this fall's elections?" Forty-two percent responded "Yes."

But John Felmy, chief economist of the American Petroleum Institute (API), dismissed the theory. "Politicians will fulminate about things, but it's the market that sets the price," he said.

According to the API, about 60 percent of the cost of a gallon of gas is directly connected to the price of crude oil, and another 20 percent comes from taxes at various levels of government.

Refining and a combination of distribution and marketing each costs roughly 15 percent, so for every dollar that a barrel of oil goes up or down, gasoline prices move about three cents.

"The very idea that we have a command-and-control oil economy is silly," said Rayola Dougher, manager of energy market issues at API. "I think if politicians were really in charge of oil prices, they'd be low. In fact, they'd probably be free right now!"

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