6 ways to lower gas prices

NEW YORK (CNNMoney.com) -- In a free market economy, there are two basic ways to bring down the price of a product - increase supply or cut demand.

So with the nationwide average price of gasoline over $3 a gallon, and at record highs according to some surveys, what can be done to lessen gas consumption or bring more to market?

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Focusing on the environmentalists' choice, we'll start with demand.

Economists say the most efficient way to reduce demand for any product is to make it more expensive. In short, a carbon tax. For gasoline, let's say an additional $1 or $2 a gallon.

Now this might not bring prices down at the pump. But it would most likely reduce demand, thus lowering wholesale prices and the profits currently reaped by oil companies and their shareholders. The tax revenue, presumably, would be returned to the public for its own benefit, perhaps in the form of better mass transit, cheaper health insurance or a gasoline tax credit for lower income people.

People representing a wide variety of interests are open to this idea.

John Felmy, chief economist for the oil industry's American Petroleum Institute, called a carbon tax "very efficient," but noted that it hits the poor the hardest and said the concept needed more study.

Jeff Sundstrom, spokesman for the motorist association AAA, said a carbon tax is "a possible approach."

But with fickle politicians believing the American public will never back anything that contains the word "tax," most say the idea has little chance of becoming reality.

"It's seen as a political dead duck," said Kateri Callahan, who heads up the Alliance to Save Energy. "There is no serious proposal for a carbon tax, and that's a pity."

Lawmakers are instead focusing on raising vehicle efficiency standards, which have remained basically stagnant for over two decades.

On Wednesday, a Senate committee approved a bill raising Corporate Average Fuel Economy (CAFE) standards to 35 miles per gallon by 2020 from the current 27.5 miles per gallon.

It's a move that, all else being equal, could shave 3 million barrels of oil a day off the nation's current 24 million barrel a day habit, said Callahan.

The auto industry lobbied hard against the bill, saying it would be expensive for business, with domestic manufacturers already being on life support.

And environmentalists are peeved the bill contains wording to lift the mandate if it does indeed prove too expensive.

But Callahan believes this Congress will pass something raising fuel efficiency standards.

Using more biofuels should also help ease demand for gasoline.

Both President Bush and the Senate are talking about mandating biofuels use that is projected to cut gasoline demand by 20 percent by 2020, although a technological breakthrough in cellulosic ethanol - ethanol made from any plant matter, not just food crops - is needed to hit those targets.

Supply is the other variable in the gasoline equation, and there are ways to increase it being considered.

With record profits at Exxon Mobil (Charts, Fortune 500), Chevron (Charts, Fortune 500), ConocoPhillips (Charts, Fortune 500), BP (Charts) and other oil companies, it's no wonder a lot of Americans think they are getting fleeced by Big Oil.

"I don't think they're meeting somewhere and saying 'oh, let's get the price up another 7 cents this weekend,'" said Judy Dugan, research director at the Center of Taxpayer and Consumer Rights. "But they know very well they can make more money by making less gasoline."

Arguing gasoline is a commodity essential for the public well being, Dugan said the government should require refiners to operate at a certain capacity or, if need be, build more refineries.

But the Petroleum institute's Felmy said requiring refineries to run at increased capacity was "a very dangerous suggestion, for the health and safety of our workers," noting the string of refinery accidents over the past few years that have killed several people.

He said some sections of the country, such as New England, could stand to see another refinery built, but he also doubted whether adding to refining capacity was a smart business decision.

"As a refiner, you're committing a couple of billion dollars, and the government's passing mandates [that are going to] reduce gasoline demand. You're going to be thoughtful of that," he said.

In addition, Dugan said establishing a strategic gasoline reserve, similar to the government's 700-million-barrel Strategic Petroleum Reserve, would go a a long way in alleviating the big jumps in gas prices whenever a refinery goes down in California or a hurricane hits the Gulf Coast.

AAA also called for a gasoline reserve as a key way to bring down prices.

But building and maintaining such a thing would be pricey, ultimately driving up the cost of gasoline for everyone, said the Petroleum Institute's Felmy.

Of course, oil prices significantly below $60 a barrel would sink gasoline prices in a hurry.

To that end, Felmy suggested opening up more of the nation to oil and gas drilling, especially off the country's East and West Coasts, thought to contain massive amounts of hydrocarbons.

But, he added, "people will oppose us expanding oil production anywhere."

And he's right. The last Congress tried to expand offshore drilling, but the bill accomplished very little. With the Democrats now in control, that idea faces even steeper obstacles.

What Congress will do is hold a bunch of hearings on energy prices - seven have been announced for the coming weeks.

AAA's Sundstrom urged lawmakers to move beyond sound bites and have a frank discussion about the actual numbers - including how much can the country really expect to get from biofuels, how much can fuel efficiency or conservation really save, and how much additional gasoline production will be needed.

"It's not enough to stand in a corn field and talk about alternative energy," he said. "We need to see the math."