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The Politics of Gas Prices







History<br /> has shown us that US presidential election cycles too often become<br /> fixated on a single issue or phrase that defines the election. In the<br /> 1980 election it was Reagan’s “Are you better off than you were four<br /> years ago?” and in 1992 the Clinton campaign was able to define the<br /> election around the phrase “It’s the economy stupid.” In the current<br /> election, one of the hot button issues seems to be the price of<br /> gasoline.<br />





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The Politics of Gas Prices

History
has shown us that US presidential election cycles too often become
fixated on a single issue or phrase that defines the election. In the
1980 election it was Reagan’s “Are you better off than you were four
years ago?” and in 1992 the Clinton campaign was able to define the
election around the phrase “It’s the economy stupid.” In the current
election, one of the hot button issues seems to be the price of
gasoline.

OPEC and Crude Oil Prices
Click
here
to view a larger version of this chart

 

While
the price of gasoline is a serious economic issue that has the
potential to slowdown the budding recovery, the solutions and rhetoric
are not matching the importance of this issue.  On the
Republican side, the solution most often heard during the primaries was
rooted in the idea that there had to be more drilling which would
increase the supply of oil. In theory, this new found supply would lead
to lower gas prices. On the Democratic side, President Obama believes
that conservation and alternative energy sources will help to alleviate
the high price of gasoline. 

Ethanol
was thought to be a solution but it has proven to be a solution that
comes at a cost. Many opponents think that ethanol is bad for the
environment and it amounts to putting food into a gas tank since about
90% of US ethanol production comes from corn. Another problem with
ethanol is that it cannot be shipped over long distances. This is
another example of what passes for a solution on the campaign trail
often fails to hold much water in the “real world”.

More
drilling in the US will not lead to lower gas prices. The high price of
gasoline has very little to do with the oil supply. In fact, when it
comes to oil, supplies have seldom been more plentiful. The Oklahoma
oil storage and pipeline facilities are filled to capacity with oil –
much of it being Canadian tar sands oil, OPEC is doing its best to keep
production up – despite the popularly held belief that OPEC is
responsible for oil prices being at current levels – and US oil
production is rising. 

The
reality is that it isn’t a scarcity of oil that is leading to higher
pump prices but a bottleneck in the refining. It might be surprising to
some but oil from western Canadian oil fields sells for a hefty
discount because of this supply bottleneck. 

As
the data in the chart above show, drilling activity as measured by the
number
of active drilling rigs, has been running at a very strong pace in the
US and Canada.  Furthermore, US oil production has rebounded
far stronger than most any expert would have thought possible even just
a few years ago. Yet, gas prices have risen. 

Gasoline
prices are being impacted to a large extent by the fact that the US
refining industry has been undergoing structural change for some years.
Refineries in the eastern U.S. are being closed down as they are unable
to produce gasoline at a profit.  Surprising as this might
sound given the pain being extracted at the gas pump, not all
refineries are profitable under current market conditions.

The
reasons for high gasoline prices are complex and cannot be solved with
slogans in 30 second television ads or bumper stickers. Both parties
owe the voters some straight talk so that real solutions can be
evaluated and implemented.

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Disclaimer:

This report is for information purposes only and is neither a
solicitation for the purchase of securities nor an offer of securities.
The information contained in this report has been compiled from sources
we believe to be reliable, however, we make no guarantee,
representation or warranty, expressed or implied, as to such
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contained in this report, whether or not our own, are based on
assumptions we believe to be reasonable as of the date of the report
and are subject to change without notice. Past performance is not
indicative of future performance. Please
note that, as at the date of this report, our firm may hold positions
in some of the companies mentioned.

Copyright (C) 2012 Pacifica Partners Inc. All rights reserved.


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