I’ve seen my fare share of “brilliant” ideas to lower the gas prices in the United States. Stage a one-day protest against buying gasoline, shift all business to one gas company in order to bankrupt another or maybe we could even tax the big oil companies into submission?

Now that the U.S. Presidential race is down to two candidates, Barack Obama and John McCain, our energy policy has become one of the most pressing issues… even outweighing the economic state and the war in Iraq. For this reason, I feel that it is time to get you all up to par on the truth about crude. These downright foolish ideas to artificially lower prices will never work; I’ll get you “in the know” on why prices are the way they are, and what we can/can’t to do fix it.

Why Are Gas Prices So High?

In short, gas prices are high because of two driving factors: high demand and increased speculation. The energy bubble that existed in the first half of 2008 has since popped, but prices are still pretty high at the pump. This holds true mainly because of a jet lag in the pipeline. Essentially, there are several steps in the oil-production business. You need to explore, find, drill, refine, transport and sell. That’s a lot for a few trips to the grocery store, eh?

There is a rumor floating around that gasoline prices actually bump up faster than they go down. I’m not trying to completely disprove this, but it is a bit ridiculous to think that despite anti-trust policies… all the nations gas stations have some secret agreement to raise prices at the same time at the same rate. Otherwise, if one seller kept prices low, you better believe that they’d get all the business. One thing I will explain further down is that the oil & gas companies are actually losing money and profit margins are dwindling.

How about speculation? While this is debatable, I feel that throughout the first half of the year… investors were gambling excessively on the futures in oil, which will drive the actual price of crude upward. I suppose that the Securities and Exchange Commission (SEC) could have made longs on oil illegal, but other than that there’s just not a lot you can do. Surely, if investors are feeling that demand is soaring while supply is crunching… things are going to get interesting. This isn’t so much anyone’s fault as it is a problem with the way we trade to make money on the open markets. But as you’ll soon find out… the heart of the problem is a bit closer to home.

Who’s At Fault?

Exploration and Production Companies
Obviously, somebody has to do the dirty work to go out and actively find oil and natural gas reserves that we can unlock later for production. Are Exploration and Production (E&P) companies making money? Yes. Are they making excessive amounts? Absolutely not. Let me explain.

One thing that people fail to realize is that these E&P companies deserve to profit, and aren’t making money hand over fist. If you want proof, let’s just look at the profit margins to find out how profitable their ventures are versus other companies:

• EnCana (NYSE: ECA) – 13.16%
• Apache (NYSE: APA) – 33.01%
• Anadarko (NYSE: APC) – 9.64%
  ————————————–
• Microsoft (NYSE: MSFT) – 29.26%
• Intuitive Surgical (NYSE: ISRSG) – 24.68%
• Goldman Sachs (NYSE: GS) – 23.68%

Crude Oil Refiners
You might be thinking that the companies that come in and refine the oil for commercial use would be making big profits… but this couldn’t be further from the truth. In fact, the majority of these companies have been eaten up by their reliance on the spot price of oil. Since all of their business relies on obtaining crude oil from someone else, they have very small guns to flex in the face of the E&P companies.

The oil refiners have some of the smallest margins in the business, and add the least to the bottom line. The crack spread, aka the margins refiners make, is absolutely free falling… as major refiners like Valero Energy (NYSE: VLO) and Tesero (NYSE: TSO) have seen their stocks dumped 50%+ in the face of a broader energy rally.

Gas Stations
Since most Americans aren’t aware of anything but the gas pump, a lot of people assume that this is where their money is going down the drain. In actuality, the gas station business is in one of the worst states as they, like the oil refiners, have almost no control over pricing initiatives. Over 1,000 gasoline stations closed down last year, and many were actually losing money every time you came to the pump in order to stay competitive.

The gas station business is so unprofitable, that major integrated oil companies like Exxon Mobile (NYSE: XOM) and ConocoPhillips (NYSE: COP) are closing thousands of branches a piece… basically cutting and running from the horrible markets where consumers complain despite the fact that station owners no longer make money.

The Government
Not so fast! Sure, a lot of us have figured out that the government has instated a gas tax… but this really doesn’t effect the price you pay at the pump. Why? The current gasoline tax has an indirect effect because of the drilling policies that are in place. What would be a lot more effective (in my opinion) would be to open up all the U.S. territory for drilling. This would discount the futures back to the present and have an immediate impact on the price of gas.

The People
So now we work down to the actual reason gasoline is so high… you. Yes, the United States demands more gas than any other nation in the world, and we just can’t get enough. Once you get down to it, it really is as simple as reducing demand. Clearly, once average gasoline prices hit a high of $4.11, we’ve been under $4 from then on out. This is mainly because Americans started driving less once prices got out of control… and it worked. Reduce demand for the commodity, reduce the price. No one-day protests. No shifty business ideas to “force” companies into cutting rates more. It’s a question of conserving what we have and being less reliant on crude oil.

The Solution

We’ve found the problem haven’t we? Nowhere along the oil & gas production line do we see excessive gains being taken off the table. In fact, it’s been just the opposite! Just take a look at the 1-year stock charts for Exxon Mobile, Chevron or ConocoPhillips! You can say that one of these companies is making $1000 a minute… but when you are the biggest company in the world like Exxon, it’s hard not to. The fact remains that demand and the low crack spread have companies across the board reeling.

Are we doomed then? I don’t think so. Throughout time, our government has found ways to innovate and react to shortages on the market. I truly believe that it is not the government that will solve this, but the free markets and the intuition of the worldwide intellect that is working around the clock on a solution. Maybe it will be the Pickens Plan, with natural gas as a headline alternative, or maybe it will be the flaunted alternative energy sources of solar, wind and clean coal. Perhaps we even find a way to use nuclear technology, the most effective (but dirty) production means, in an innovative way.

In the meantime, we can fix the problem by using alternatives to driving and demanding oil. America alone uses about 1.3 trillion gallons of gas per year. Other countries like India use about 1/20th of that! True, America is a nation that was literally founded on the use of petroleum… and you’d be surprised to realize that the amount used per capita is currently about half of what it was in the 1980s. That being said, prices probably will rise from here… but this isn’t a problem we can’t fix.

-The Net Fool

Disclaimer: Many of these investing ideas brought to you by BullishBankers.com

If you enjoyed this post, make sure you subscribe to my RSS feed!