This is a partial transcript of "Special Report With Brit Hume," August 19, 2005, that has been edited for clarity.

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BRIAN WILSON:, GUEST HOST: Here’s an example of how skyrocketing gasoline prices are affecting business and, in turn, you, the consumer. UPS (search) says the cost of gasoline to power its fleet of big, brown trucks has jumped 45 percent since the second quarter of 2004. The U.S. Postal Service (search) is thinking about hiking prices. Every penny increase in fuel cost adds $8 million to post office expenses.

This week, gasoline costs on average $2.75 a gallon. And now comes word that natural gas prices and fuel oil prices could be significantly higher this winter. Any relief in sight? Joining us to talk about what’s ahead is Jerry Taylor, the director of natural resources for the CATO Institute.

Good to have you here. Thanks a lot.

JERRY TAYLOR, CATO INSTITUTE: Thanks for having me.

WILSON:: I get the impression, a lot of people are saying — in fact, let’s just pull up this quote from the Lundberg people, the kind of a group that looks at energy issues all the time.

And they say — and here is a direct quote — "The higher gas prices are the result of strong demand and not weak supply. And as such, they do not portend an economic crash."

Is that true? Are we talking about not so much an issue of demand but the fact that it’s not a weak supply, it’s a great demand?

TAYLOR: Oh, yes, we hear all the time about how prices have set record levels. And if they adjust for inflation, they really haven’t, but they are very high. In nominal terms, they are record.

But so is supply. We have never produced more oil in this market than we are today. In fact, since 2002, OPEC production is up 17.5 percent, global production is up 10 percent. So we have record levels of production. It’s just the global economy is doing very well, and that’s where the demand...

(CROSSTALK)

WILSON:: And there’s a tremendous demand for the product that’s out there. And I guess not all of it is coming from the United States.

TAYLOR: No, in fact, the leading driver in the demand growth around the world today is China (search). China has increased their demand for oil by about a million and a half barrels per day. The United States has increased by about 700,000 barrels a day.

WILSON:: So we see now $2.75 on average for a gallon of regular around the country. Is that going to drop off any at all in the coming months?

TAYLOR: It may drop off a bit, because the driving season will be passed, and that’s usually when you see the spike in demand for gasoline, and then it alleviates a little bit. But right now, the problem in the gasoline markets is crude oil markets.

The increase in gasoline prices tracks almost exactly the increases in crude oil, and it takes years for investments in new supply to come on- line. That’s why this crisis is lasting as long has it has. It takes billions of dollars and several years for new supply to come on-line. It’s going to come on-line at some point, but it won’t be coming on-line next month.

WILSON:: You say, though, if we look at the history of the United States, about every 20 years we go through this?

TAYLOR: Oh, that’s clear. If you look at the history in the oil market, you’ll see that about every 20 years or so, there’s a peak in price. And then what happens is, there’s an avalanche of new supply that comes into the market. Usually the suppliers over shoot, prices collapse, and then we live off all of that excess production capacity for about 20 years, until it’s slowly eaten away, and then we go through the same cycle again.

WILSON:: So it’s an up-and-down rollercoaster that comes every 20 years?

TAYLOR: Exactly. It’s a cyclical commodity market, just like most commodity markets. And in fact, it’s been 24 years since the last price spike, which was in 1981. So this particular event comes pretty much like clockwork.

WILSON:: We were overdue, is what you’re saying.

TAYLOR: Right. Exactly. When prices collapsed in 1986, because of the huge amount of supply that came on the market in response to the last OPEC (search) price spiral — in 1979, is when that was touched off — we essentially lived off all of that excess production capacity for about 20- odd years.

It’s been eaten away over time. It disappeared. So production is tight now. There’s no loss of supply. It’s just that demand is surging and there’s no slack capacity to touch on, so now we have to wait for it to come on-line.

WILSON:: So I guess if folks are at home are listening, one thing they should draw from this, is we’re going to have to adjust our budget, adjust the money that we have in our checking account every month, to pay for higher fuel prices in the foreseeable future?

TAYLOR: Oh, absolutely. But, you know, that’s entirely within people’s control. How much they spend on gasoline depends on what they drive, and how far they drive, and where they live, and...

WILSON:: Not always in control, though, for a business that — they have to accomplish certain things to make money.

TAYLOR: That’s true. For businesses, a lot of these are fixed costs and they can’t always pass them on to consumers. And that makes it very tough for a lot of these companies.

WILSON:: All right. Now, I was looking through the state wires today, in places like New Mexico and Ohio, and just looking for stories about gasoline, oil, et cetera. A lot of states are now beginning to voice concerns that we’re going to have similar problems this winter when it comes to fuel oil and natural gas, which many people use to heat their homes.

TAYLOR: Yes, in a way, it’s a perfect storm, because natural gas (search) markets are largely different from oil markets. There’s no particular reason why natural gas prices need to be spiking right now while oil prices are, but that’s exactly what’s happening. Natural gas prices are about triple where they were in 2000...

WILSON:: Wow, you say triple?

TAYLOR: Triple. And there’s nothing in the near term that’s going to change that. We don’t notice though prices very much in the summer because we use natural gas primarily as a heating fuel. We’ll notice it this winter.

And in fact, that’s kind of the untold story. The bigger hit on the pocketbook isn’t necessarily going to come from the gasoline price. It’s going to come from heating prices this winter.

WILSON:: And so heating oil is going to be pretty high this winter?

TAYLOR: Well, it is. But, again, very few people rely on heating oil. In the northeast, they do. But outside of the northeast, primarily it’s natural gas.

Now, there’s no globalized shortage of natural gas, but the United States is starting to run low, which is why they’re trying to build liquefied natural gas terminals so we can tap into the world market. Most market analysts think, as soon as we get these LNG terminals built, which allows us to import natural gas from abroad, you’re going to see prices come back to normal again, but it will take a few years.

WILSON:: Three Democratic senators have sent a letter to the president today saying that, "We want you to do something about the high gas prices." What can a president do about high gas prices?

TAYLOR: A president can’t do very much about gasoline prices, because they’re largely driven by crude oil prices, and crude oil prices are driven by global supply and global demand considerations. The biggest factor of the thriving global demand right now is China’s economic growth, which is generally a good thing.

Basically, we need to wait and let prices do their job. High prices signal to consumers they might want to conserve. It signals to producers they can make a lot of profits by producing new supply into the market, and that will do a better job than alleviating this crisis than anything the government could do.

WILSON:: I guess anything the government could do would be related to the tax side of the equation, because there’s a certain amount you pay every month, every day for gas is taxes, right?

TAYLOR: Well, exactly. Americans are paying a lot more in gasoline taxes than anything.

WILSON:: Got to go. Thanks a lot.

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