Myths About That $3.18 Per Gallon

By Lisa Margonelli
Sunday, June 3, 2007

Whew, gas prices are high. Higher than they've ever been. During the week of May 21, the Lundberg Survey, a biweekly gas price tracking service, put the average cost of a gallon of unleaded at $3.18. Adjusted for inflation, that topped the 1981 price spike that had held the record for 26 years. Prices have slipped a bit since then, but many predict they'll stay up near the stratosphere all summer. Wondering why? The answers may not be what you think. Here are five common myths about why we're paying so much at the pump.

1. Those evil oil companies are gouging us.

Whenever gas prices soar, Republicans and Democrats join hands to virtuously denounce "gas gouging" by greedy oil companies. Two weeks ago, the House passed legislation against this supposed scourge of the pump. Too bad it's so hard to find evidence that gouging is jacking up prices. Multiple investigations by the Federal Trade Commission since 2000 have come up, well, dry.

Conspiracy theorists say this lack of evidence is proof that the regulators are in bed with the oil companies. But last year, California's Energy Commission undertook its own investigation of a May 2006 price increase -- and found no smoking gun indicating market manipulation. Today's high prices are the result of a collision among consumers' increasing demand for gas, a shortage of oil-refining capacity and 50 states with different regulations that make it hard to trade gas across state lines.

So why protect consumers from this vaporous phantom? Politics. More than 80 percent of Americans believe that high gas prices are the result of oil company shenanigans rather than market forces, according to the Opinion Research Corp. So passing legislation against gouging is a bit of theater that allows the political class to avoid the hard work of getting Americans to use less gas.

2. Here's the solution to our pricing problems: ethanol.

Hogwash. This plays wonderfully in corn-rich Iowa, but corn ethanol will neither replace gasoline nor lower its price. It may even raise gas prices.

First, at the pump, ethanol is priced according to what consumers will pay, not what it costs to make. So, according to research by Soren T. Anderson of the University of Michigan, ethanol prices follow gas prices very closely. It's unlikely that gas will make a U-turn and start following ethanol.

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