June 2008 News Update

Is there a short-term fix for high gas prices?

Rising oil and gas prices have lawmakers and consumers scrambling for solutions, but it is unclear whether anything can be done to lower energy costs in the short term, experts say. A confluence of factors, from supply and demand to speculation and a weakened dollar, are driving gas prices higher.

The price of oil has doubled over the past year. A barrel of crude oil cost about $65 in June 2007; it is currently hovering around $130 a barrel.

Gas prices have skyrocketed as a result, with some American consumers paying more than $4 a gallon. The national average is $3.95 per gallon, according to a AAA survey published May 29. A year ago, the national average was about $3.20. Observers say several factors, domestic and global, are responsible for the price increases. Although demand is falling in places like the United States and Europe because of high prices, it is surging in emerging markets like China and India. Meanwhile, concerns are rising that supply -- battered by political instability in some oil-rich countries and a decision by others to not increase production substantially -- is not keeping up with demand. Additionally, the declining value of the dollar, the currency used by the international oil market, has made it easier for Asian and European countries to purchase oil.

Some experts say speculation may also be playing a role in the rising price of oil. Many investors look to commodities like oil to act as a buffer against inflation, which typically occurs when -- as is the case now -- interest rates are low and the dollar is weakened. Other experts say the effect of speculation is minimal to negligible. Whatever the cause, federal and state lawmakers are anxiously searching for short-term relief. Their options, however, seem limited.

The gas tax holiday debate

Two presidential candidates, Arizona Republican Sen. John McCain and New York Democratic Sen. Hillary Clinton, proposed a federal gas tax holiday this year to provide some savings for American consumers. The plan would place a moratorium on the 18.4 cent-a-gallon federal gas tax for the summer, the time of year when Americans tend to drive the most. McCain admitted that the tax break would have a limited effect. He said it would amount to a "little bit of a break for the summer" for low-income Americans.

Democratic presidential nominee Barack Obama, an Illinois senator, called the proposal a gimmick. He voted for such a tax holiday in his home state in 2000 but said it provided little benefit for consumers. In addition to Illinois, three states -- Florida, Indiana, and Georgia -- have enacted gas tax holidays over the past decade. Lawmakers in several states are mulling similar cuts this year, according to published reports. The combination of local, state and federal taxes can total more than 40 cents a gallon in some parts of the country, according to the American Petroleum Institute, a trade group that represents the American oil and natural gas industry. In short, there is very little the government can do in the very short-term, other than providing information about the potential for government to act.