NCPA - National Center for Policy Analysis

What Drives Gas Prices?

August 30, 2011

For much of the summer, high gasoline prices have been in the news.  As of this writing, the national average gasoline price per gallon hovered around $3.50.  The public is unhappy with these high gas prices, and politicians are scrambling to find ways to reduce the pain -- or, failing that, to publicly shoot the messenger by investigating, penalizing or punitively taxing oil companies.  In a new paper, Kenneth P. Green, a resident scholar with the American Enterprise Institute, explores the true causes of oil price fluctuation and explains how policymakers can help lower gasoline prices.

Key points in Green's paper include:

  • High gas prices are inducing consumers to tighten their belts and politicians to call for taxes on oil companies.
  • About 85 percent of oil price hikes are due to supply and demand, and the remaining 15 percent is likely attributable to environment-conscious regulations.
  • To help lower gas prices and promote domestic employment and trade benefits in the future, policymakers should facilitate drilling offshore and in the Arctic National Wildlife Refuge, and lift boutique-fuel requirements.

Source: Kenneth P. Green, "What Drives Gas Prices: Cartels, Speculators, or Supply and Demand?" American Enterprise Institute, August 2011.

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