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The Truth About High Gas Prices

With all the political rhetoric flying, the basic facts about gas prices can get lost.

Tune into a presidential campaign event for a few minutes, and you'll start hearing about gas prices, from both President Obama and the Republicans who want to take his place. With all the political rhetoric flying, the basic facts about gas prices—why they're high, whether drilling for oil can help, how they're connected to solar and wind power—can get lost. Here's what you need to know to keep this issue straight.

Why are gas prices so high? It might come as a surprise to anyone who’s been following the primary, but the answer to this question has little to do with American politics.

One of the main reasons prices have spiked is international politics, specifically tensions with Iran. The United States and the European Union want to discourage Iran from developing its nuclear program, and to show they’re serious, the E.U. put a ban on oil imports from Iran, starting July 1. The United States is supporting the ban by putting sanctions on countries that do buy oil from Iran: The central banks of countries that do won’t be able to conduct business with the United States. All of this international maneuvering freaks out oil traders, who want to buy oil now in case it gets really, really expensive once all these restrictions kick in. Oil prices go up; gas prices go up.

But gas was expensive last year, too, even before Europe and Iran were on the outs. The projected peak for gas prices this year is $3.96. Last year’s peak price? $3.96. The record price occurred back in 2008, at $4.11.

These price peaks don’t have much to do with American politics or policy, either, though. They’re generally attributed to growing demand from the economies of countries like China and India. The world only produces so much oil, and when more people are trying to buy it, the price goes up.

But don’t we have a ton of oil? Relatively speaking, yes, we do. Only Russia and Saudi Arabia produce more oil per year than the United States The amount of oil we produce is also increasing: 2010’s haul was larger than than any other year since 2004.

But that’s all irrelevant, for the most part. The amount of oil we produce here doesn’t affect gas prices—at least, not in the short term. Energy experts often talk about this in jargon-y terms: they’ll say that oil is a “global commodity” or that oil is “traded on the world market.” What this means is that oil is valuable enough, uniform enough, and cheap enough to transport that it makes financial sense for a country like the United States to buy oil halfway around the world in Saudi Arabia, if that’s where it’s cheapest. On the flip side, if the U.S. starts pumping more oil out of the ground, other countries will want to buy it.

The upshot of all this is that even if the United States starts pumping all the oil it can out of the ground, now, U.S. consumers will still have to compete with other countries’ consumers. If there’s enough demand (and there is), prices will stay high. Over time, if the U.S. kept pumping all the oil it could out of the ground, it could increase the global supply of oil, which would help meet demand from countries like China. That would bring the price of gas down—but probably only by a few cents.

Do high gas prices help renewables? Over the weekend, Mitt Romney said Obama should can the Secretary of Energy, Secretary of the Interior, and Environmental Protection Agency Administrator because “those three are on a mission to drive up the price of gasoline and all energy so that they can finally get their solar and their wind to be more price-competitive.”

It's true that Energy Secretary Steven Chu did once say he wished gas prices were higher. (He’s since said he’s changed his mind about that.) But higher gas prices won’t drive demand for wind and solar, since alternative energies compete most directly with coal and natural gas as sources of electricity. Higher gas prices could push consumers toward buying more fuel-efficien (or even electric) cars and living in denser areas.

But one of the reasons high gas prices hurt so much is that there’s no alternative for people who get around by car. Even if solar and wind were the cheapest sources of energy out there, they wouldn’t be much help to most people driving around today.

Photo via (cc) Flickr user dno1967b

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