Supply and Demand Drive Gas Prices Up

This is a partial transcript of "Special Report with Brit Hume", March 30, 2004 that has been edited for clarity.

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BRIT HUME, HOST: Gasoline may still be cheaper than some of the cheapest bottled water, but prices are higher than they have been. And in an election year that adds up to a political issue. So why are prices up? And what if anything can government do to get them down soon?

For answers, we turn to Mark Baxter, director of the McGuire Energy Institute at Southern Methodist University in Texas. He joins us from our Dallas bureau.

Mr. Baxter, what are the ingredients of these high prices we're experiencing in gasoline today.

MARK BAXTER, DIRECTOR, MCGUIRE ENERGY INSTITUTE: Well, Brit, the main ingredient, we'd have to go back and look at the prices of crude oil. And basically, the supply of crude oil is not meeting the demand that's required in the world. And that predominantly is what OPEC (search) is releasing or exporting from their member nations.

HUME: Now, has OPEC cut production to cause this? Or is it because demand is up and if so, where is all this demand coming from?

BAXTER: It's a combination of both. OPEC has cut production and pulled in their overcapacity, or at least they've claimed to, basically because they like that revenue stream. But there's also an increased demand because we have economic growth, both here in the United States and the Asian part of the world.

HUME: You're talking about China.

BAXTER: China predominately, yes.

HUME: Is China the biggest part of it?

BAXTER: China is a big part of it. But we also have economic growth here in the United States.

HUME: And so between those two things, we have got demand up; supply is either down or is it basically holding and about what it was?

BAXTER: Supply is not quite holding where it needs to be to take care of the demand side. And that's why we see our inventories going down also. And our inventories are low today.

HUME: Now, what does -- what has the administration done, if anything, to pressure OPEC. And what has OPEC either done or said it would do?

BAXTER: Well, the administration, in the past through the secretary of energy, has explained to OPEC our grievances on not raising the quotas. I'm sure there are diplomatic things...

HUME: The quotas being the allotment -- the quotas, of course -- just to interrupt you for a moment. The quotas are, of course, the amount of production within a cartel, OPEC being a cartel that is allowed for each member state. Everybody has a quota; that is the amount they're allowed to produce. They're not supposed to produce any more because that would cause the price to go down, right?

BAXTER: Well, that's correct. And none of them live to those quota, and they mostly all overproduce.

HUME: But the overproduction at this point, I take it, has been not been enough to accommodate rising demand around the world?

BAXTER: That is correct. Our inventories are still going down.

HUME: Now, we have this thing called the Strategic Petroleum Reserve (search); I guess it's down Louisiana. It's a great, big facility underground that houses oil that is being stored there in the event of a national emergency. Presumably, that usually means a defense emergency, in which we'd be cut off from OPEC or outside suppliers' altogether.

It has been proposed by John Kerry, I believe that we simply stop putting oil in there and as long as we're not taking that much oil -- that oil off the market, that would have an effect -- a noticeable effect on oil prices -- or gasoline prices. Would it?

BAXTER: Well, that's correct. And that's not only John Kerry promoting that but some other congressional people also.

We do have a Strategic Petroleum Reserve. It's four sites based in both Texas and Louisiana. But my opinion is the amount of oil being put into those reserves today wouldn't have the type of impact on gasoline prices that a lot of people would perceive or would be looking for.

For example, I think if we keep putting into Strategic Petroleum Reserve about 5 billion barrels a month that they're talking about, it would reflect a three to 3 1/2-cent savings at the gasoline pump. And I don't think that's what the American consumer is looking for.

HUME: What about if we not only did that, but we also began to draw down some of those reserves in some amount? Could we get a significant bang out of that to affect the prices?

BAXTER: You could. It depends on what kind of bang you're talking about. Because we can withdraw at a maximum rate of 4 million barrels per day and we can do that for about 90 days. But that's a short-term fix, and I don't think that's what's required. We need to...

HUME: But that wouldn't exhaust the reserve, would it?

BAXTER: No. It takes about six months to completely exhaust the reserve, but that would not be at the rate of 4 million barrels per day. You can do 4 million a day within 90 days and then your withdrawal rate will reduce after 90 days. And it keeps reducing thereafter.

HUME: And what would 4 million barrels a day, what would that do to the cost of a gallon of regular -- or a gallon of gas?

BAXTER: Well, assuming that OPEC would not adjust their quotas, they would drop the cost of barrel of crude substantially, more than what we would realize. But I don't think that's a realistic point, because OPEC would not allow that to happen. They would actually cut their quotas to keep the equation equal for world supplies.

HUME: So in other words, it would be within OPEC's power then, and it would be in OPEC's interest then to adjust the supply down to keep the price at the current level, correct?

BAXTER: Right. And I think we're seeing some effects of that right now.

HUME: All right. Let me just ask you one other question, and that is about -- one federal government taxes on gasoline, which are only part of the tax picture, but they're about 18-cents a gallon, I gather. Now, if that's the case and the Congress and administration decided to suspend that, that would obviously automatically reduce the price of a gallon of fuel by 18-cents.

You heard it suggested, earlier in the report that we did, by one Democratic senator that OPEC would simply ramp up the production to maintain that price. Would OPEC really have any incentive to do that?

BAXTER: Well, the incentive for OPEC not to ramp up the price is their fear of losing market share from non-OPEC countries, such as Russia and Norway and Mexico. Plus, I'm not in favor of the 18 1/2-cent decrease in federal tax on gasoline, because you're going to have to generate revenue from other sources to pay what the gasoline tax pays for right now.

HUME: Well, and also, of course, if that -- but if that's where the price came from it wouldn't come out of OPEC's hide, would it? Last question.

BAXTER: That is correct. OPEC would still get their $35.50 barrel. It would be the federal government, which is us, the American people who would actually be forfeiting that 18 1/2-cents and paying it at other places.

HUME: Mark Baxter, thank you very much sir.

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