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America's 'Gas' Problem

Prepared by: Robert McMahon, Editor
Updated: May 8, 2006

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Experts have warned for years of U.S. reliance on foreign sources of oil, but it wasn't until gas prices hit $3 a gallon, it seems, that most Americans began paying attention. For the moment, political Washington is lurching and grasping for short-term fixes and easy culprits (ChiTrib). Meanwhile, the White House is taking new interest in fuel efficiency for certain types of cars as polls show most Americans think President Bush can do something about gas prices (Economist). Certainly, the confluence of record oil industry profits and Bush's own ties to Big Oil are creating a dilemma for the White House (WashPost). Yet the politics of energy should not be confused with policy, which CFR President Richard Haass, writing in Newsweek, says is lacking.

To create policy requires the understanding that the factors influencing prices at the pump are complicated. Philip K. Verleger, in an interview with cfr.org's Bernard Gwertzman, says prices may have peaked for now, but the market is so volatile that hurricanes, political unrest, or other events could send them much higher. The price of gasoline is suject to many variables, including refining costs, taxes, and distribution fees, as this new CFR Background Q&A outlines. The biggest factor is the supply of crude oil, from which gasoline is made, and the United States gets most of its supply from abroad. With the emergence of developing economic powers like China, India, and Brazil, global demand for oil has surged from about 70 million barrels daily in 1995 to almost 84 million barrels daily today. China's quest seems to know no bounds, writes MSNBC.com's Kari Huus. China's efforts to seal reserves in Africa is outlined in this CFR Background Q&A. As economist Robert Samuelson points out, with the shrinkage of spare production capacity, any supply interruption—from turmoil in Iraq to rebel attacks in Nigeria—can send prices soaring (WashPost). Some Wall Street analysts have estimated that the uneasiness created by crises in Iraq and Nigeria, as well as unstable environments in Iran and Venezuela, have added a $10 to $20 risk premium to the price of oil per barrel (Newsweek).

The impact of foreign events on U.S. prices at the pump is nothing new, of course. The 1973 Arab oil embargo, Iran's 1978 revolution, the Iran-Iraq war of 1980 to 1988, and the 1990-91 Gulf War all led to crude-oil shortages and spikes in U.S. gas prices, notes the U.S.-funded Energy Information Agency. But those events did little to dent U.S. dependency on foreign oil, as this CFR Background Q&A explains. The United States now imports nearly 60 percent of its oil. What has made that dependency particularly worrisome is that foreign governments control up to 77 percent of the world's oil reserves, according to PFC Energy, an energy consulting firm. These governments have "wide latitude to shut off the taps for political reasons," warns U.S. Senate Foreign Relations Committee Chairman Richard Lugar (R-IN).

There are those, such as Saudi Oil Minister Ali al-Naimi, who dispute this reasoning, arguing dependence on foreign crude does not translate into higher prices at the pump. Naimi says local conditions have much more of an impact, pointing out that in Japan, which imports nearly all its oil, consumers pay $4.33 per gallon of gas, while in Britain, a net exporter of oil, consumers pay nearly $6 per gallon.

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