05/24/2007 10:13 am ET Updated May 25, 2011

Oil Price Sticker Shock

Now that gasoline prices have soared beyond $3 a gallon, I'm reading the business stories on the subject a bit more closely. I'm even reading those full page ads from "the people of America's oil and natural gas industry," which claim it's all about the price of crude oil, which accounts for 56 percent of each gasoline dollar.

If that were true, how do you explain the fact that when gasoline prices (in real, inflation-adjusted dollars) peaked at $3.29 per gallon in March 1981, the real, inflation-adjusted price of a barrel oil was $89. This month, according to the Energy Information Agency, the price of oil going into our $3.01 gallon of gas (national average) is $60 a barrel (this is the actual acquisition price, not the future prices, which closed yesterday just under $66 a barrel).

Nasty facts. They always did get in the way of a good story. And they certainly don't have to be taken into account by Big Oil's advertising departments.

A poll-driven story on the front page of The Washington Post business section suggests people won't change their driving habits until gasoline reaches $4.38 a gallon. It explains these results by pointing to higher average household incomes today (so fuel takes a smaller relative bite out of paychecks despite the high prices) and the absence of alternatives. People have to drive, to get to work, to get to shopping, and, for most people, to go on vacation.

It only mentions in passing the unequal impact of rising prices. If you're driving to a job that pays Wal-Mart wages, eliminating your daily latte to pay for gas isn't really an option.

The story left out another important factor, however. Fuel efficiency has gone up in the past quarter century -- from an average of 15.6 miles per gallon to 21.5 miles per gallon today. So while we're driving more miles, the average cost per mile driven today (including the vehicle depreciation, insurance, etc.), even with comparable gasoline prices to 1981, is just 14 cents compared to 20.9 cents per mile shortly after Ronald Reagan became president and the U.S. economy was still reeling from the second great oil price shock of the 1970s.

Which brings me to the oil industry press release masquerading as a news story that was on the front page of The New York Times this morning. Based almost exclusively on oil industry executive quotes, the story is premised on the idea that refinery capacity shortfalls are responsible for the current run-up in gasoline prices and that "uncertainty" in the current environment due to government support for ethanol substitution is causing the industry to cut back on plans to expand refinery capacity.

So what is it, Mr. Oil Industry Executive? Crude oil prices or refinery capacity shortfalls? The crude oil data suggests neither supply and demand nor the cost of inputs plays a determining role in pump gasoline prices. They matter, of course. But the ultimate driver of pricing in this oligopolistic industry is whatever the market will bear.

The falling price of driving and rising incomes, coupled with a compliant government whose Justice Department and Federal Trade Commission do not believe this nation still has antitrust, anti-price gouging and other statutes outlawing anti-competitive marketing practices, means the oil companies can charge whatever they can get away with. And it looks like this driving season -- the second-to-last of the man the oil industry put in the White House -- that is going to be a lot.