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Why are Gas Prices So High?

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oil price hikeNot too long ago, for Spring Break, my son and I took a road trip to Arizona to visit my grandfather. One thing I noticed: As I drove farther south, the gas prices rose. By the time we reached Arizona, we were paying more than $4.00 per gallon!

I’m not the only who has noticed a rise in gas prices; there are predictions that $4.00 gas is going to be the norm for this coming summer. But why are gas prices so high? While politicians like to point fingers and blame the president, or try to find a scapegoat, the reality is that there are a number of factors that go into the price of gas.

Price of Crude Oil

The biggest influencer of gas prices is the price of crude oil. Gasoline is derived from crude oil, and when oil prices rise, so does the price of gas. However there are different factors that influence the price of crude oil, since there are markets involved. Perception of the global economic situation, demand for oil, and the supply. In a lot of cases, oil prices are driven by speculation, since traders make decisions based on what they think will happen in the future.

If traders are worried that supply will be restricted by Iran closing off the Strait of Hormuz (where 20% of the world’s oil passes through), then they might buy more now, and drive prices higher. If the perception is that the global economy is picking up, it is assumed that demand for oil will rise — and that means prices will go up as well.

The U.S. Energy Information Administration offers the following illustration showing what goes into the cost of gas in the United States:

Gas Prices

As you can see, crude oil is a huge part of the price of oil, and other factors include refining, distribution & marketing, and gas taxes. But really, a lot of the variables that affect crude oil prices have an influence overall on the price of gasoline.

Could Increased Production in the U.S. Bring Gas Prices Down?

Many people think that gas prices would come down if the strategic oil reserves were opened, or if the United States stepped up oil production. Right now, the U.S. only accounts for about 12% of the world’s oil production. Any increase in production would likely be insufficient to drop oil prices. Indeed, as you can see from the following chart at Grist, U.S. production has had little to do with oil prices:

Oil production U.S.

There are plenty of swings in gas prices — many of which are due more to market and global factors related to oil prices rather than production in the United States.

In the future, the U.S. is less likely to play as big a role in oil anyway. China and India each have a growing middle class and competition for resources is likely to intensify. Even if the U.S. boosts its oil production and releases stockpiles (which would likely have a short-term effect on oil prices and gas prices, but not a long-term effect), the future of gas prices is unlikely to be impacted greatly. Future demand is expected to be too high.

And, of course, there is the fact that oil is, by definition, a finite resource. It can only become more scarce — and the price of oil (and the price of gas on which its based) can only trend upward over time.

(Photo: The Philippine Online Chronicles)

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28 Responses to “Why are Gas Prices So High?”

  1. mark says:

    Welcome to the world!

    You should come to the UK where we pay $10 a gallon.

    Might encourage US car makers to build efficient cars , here I investigate if my Honda 4wd is getting under 44mpg, probably about the same as a US hybrid gets.

  2. A completely unsustainable resource in the long run.

    I wonder if both countries on either side of the Straight of Hormuz (Iran and the UAE) would need to agree on closing the Straight. Seems to me both those countries (and perhaps the whole region) should have ownership over the waterway.

  3. Regarding US domestic oil production: It strikes me that all the oil that oil producers are willing to produce at current oil prices is being pumped now. To make production of additional reserves sufficiently profitable, oil prices would have to rise, which sort of defeats a goal of cutting the cost of gasoline, no?

  4. freeby50 says:

    Its discussed in the article on gas taxes, but I’ll go ahead and bring it up too… gas taxes are absolutely not the reason at all for increased gas costs in the US. The taxes on gasoline are not levied as a % of the cost of gasoline. Its not charged like sales tax. Gas taxes are a fixed amount per gallon. So you don’t pay 11% tax you pay 18.5 cents per gallon to the federal government plus variable state taxes. If a state raises gas taxes a few cents then the gas in that state will go up a few cents. But other than that taxes aren’t changing the gas prices.

    The primary reason gas is more expensive in other nations is taxes. Countries in Europe usually have gas taxes of several dollars per gallon.

  5. Fabclimber says:

    We are still an oil based economy. Let’s keep that in mind while we are paying more. We were built and have thrived on this natural resource. Now we are beginning to pay the real price. If you think the wars in the middle east are about freedom you are incorrect. It’s still all about protecting our interests in oil. At present we cannot survive without lot’s of oil.

  6. Matt says:

    We have not opened a new refinery since the 1970′s and have tons of untapped oil reserves, that is why gas prices are so high.

    • Tony O says:

      You obviously didn’t read the article. We could drill all the reserves we currently have an NOT put a real dent in the overall supply of oil in the world, which is what sets the price.

      • Dianne says:

        Yep Tony O, you are correct folks don’t get it. We could drill our reserves full force and not put a dent in oil price reduction in the long run. We just don’t have enough oil. So why build more refineries our oil supplies are limited.

        Our economic model for energy is simply not sustainable. The amount of oil available on the planet it finite. This is not a political issue. We’ve got to do something else especially for future generations.

  7. bloodbath says:

    ‘traders make decisions based on what they think will happen in the future’

    How come the price does not go down when ‘think’ they would make lots of money in the future?

  8. Himanshu says:

    The gas prices in Bangalore, India is INR75 / Liter ~ $5.67 / Gallon. In terms of Purchase price parity it translates into $22.68 which is way more than any place. Here taxes (sales / VAT / Excise etc) accounts for more than 60% of gas value.

    The middle class is expanding, consumption will keep on increasing here. 2 wheeler commuter motorbikes are very common here that gives 150 miles per gallon and cars are very fuel efficient.

  9. Shirley says:

    Good article and it helped to solve a “difference of opinion” here on crude oil price vs distribution and refining. Thanks.

  10. mart says:

    ON THE OTHER HAND IF PUBLIC TTRANSPORTATION WERE UPDATED, AND MADE MORE EFFICIENT, SO PEOPLE WOULD BE COMFORTABLE USING THEM, WE WOULD CUT DOWN ON GASOLINE CONSUMPTION, AND THE DAMAGE TO THE ENVIRONMENT.

  11. Mike says:

    Environmentalists want us to stop buying big SUVs or take more public transportation to bring down gas prices. Until I move out of the snow belt, that’s a fat no for me.

    I’m sure well before gas begins to dry out there will be other technologies that would be able to fill the gap. Right now I think I’ll stick with gas.

  12. sierra1194 says:

    I’d like to know why, aside from all the added taxes, etc., I am paying so much more for Diesel fuel as opposed to gasoline? My understanding is that diesel is less refined than regular gasoline, so why does it cost more now? It used to be less expensive than gasoline.

  13. Wolf says:

    OK, let’s break it down:
    42 US gallons crude/barrel
    Brent crude present price $119.76
    WVI crude present price $104.42
    Average crude price/barrrel$112.09
    Divide by 42 gal/barrel cost = $2.66/gal.
    assuming price at pump $3.9
    11% tax cost = $0.429
    6% dist & market = $0.234
    16% refining cost = $0.624
    total cost (ave+11%+6%+16%) = $3.95/gallon
    Problem is the intial cost assessment; from a barrel of crude we get:
    47% gasoline
    23% diesel and heating oil
    18% other products
    10% jet fuel
    4% propane and
    3%asphalt; there is a net gain in volume of 5% relized during refining, so
    the crude cost of gasoline should really be 0.47 x $2.66/gal =$1.25, therefore:
    $1.25+$0.429+$0.234+$0.624 = $2.54. Do the math.

  14. TomM says:

    Common now….if we began drilling domestically and producing our own oil and gas without purchasing it overseas the price would certainly go down. The other issue we have is that no new refineries have been built here since the 70′s. So, in one respect you are correct as even if we did drill domestically we still wouldn’t be able to refine it to drop the price of gas. And all of the refineries here are already running at 90%+ capacity. It’s all politics and beyond that imagine what would happen if Iran, Iraq, Saudi Arabia and all the other oil producing countries of the world couldn’t sell their only resource to the rest of the world….you think we have a terrorist problem now….what do you think would happen if their main buyer of petroleum went away and they didn’t have that revenue coming in?

    The sooner we start drilling and building more refineries the better off we’ll be….but that won’t happen until we can get the guys in Washington to make it happen. Which I don’t see happening anytime soon. There’s too much money lining Washington’s pockets to make this happen.

  15. Wolf says:

    OK. I guess my intial attempt at posting a comment was too long, so in a nutshell:
    Average cost of barrel of crude right now is $112.09
    42 US gallons in a barrel, therefore, $112.09/42gallons = $2.67/gallon
    Reality only 47% of a barrel of crude equates to gasoline, the rest goes toward other products and, actually a 5% increase in volume of refined products; so the refiners realize a net gain in volume of products from barrel of crude.
    Anyway: $2.67/gallon cost x 0.47 = $1.25/gallon adjusted cost, adding in all the taxes and costs should result in a pump price of $2.54/gallon, not the $3.90 we see now

  16. Charles says:

    “Crucify Them” as an EPA policy objective doesn’t help matters either.

  17. Bart says:

    Gas prices are increasing because most world governments are printing money and devaluing their currencies. Weaker currencies by less units of any given commodity.
    Want cheaper gas? Tell your government to STOP printing money and live within a budget like the rest of the world!

  18. Chico says:

    Bart has a good point, the value of currency along with the speculative nature of crude oil prices are the biggest factors affecting US buyers of Gasoline. While I definitely support the free market, I would be all in favor of trading regulations that would remove the short term volatility from essential commodities like Energy, and Food stocks. A 12 month minimum hold for trading stocks in these area’s would allow real investors to still seek market based profits, while at the same time, getting the short term gamblers away from the table.

  19. eric says:

    Great article Miranda! Good research :)

  20. Tony says:

    I have a question, why can’t we drill our own oil and keep it on our own market for our nation’s use only. Give govt permits to drill with stipulations that watever oil we tap has to stay here and cannot be sold outside of the country. wouldnt that bring cost way down.

    • Kay says:

      Best point made so far. The biggest issue with more domestic drilling is that there are no guarantees that the oil stays in this Country. How much of our oil is exported?

    • Tony O says:

      Because the oil companies want to get the highest price they can for the oil they drill. That’s capitalism.

      I’m not saying I don’t support what you said because I have actually used that argument to argue against new drilling. In other words, if there is no benefit to the American people directly, then why should I want big oil to drill baby drill? because their profits aren’t large enough yet?!!!

  21. Tony says:

    also agree with Bart, that our liberal socialists in office need to learn how to be more responsible with everyone elses money. wonder if they handle there own money and expenses the same way.

  22. Wen says:

    It seems to be that since oil is traded in dollars, the less our dollar is worth, the more it will cost. I think the current policy of printing money to bail everyone out is a key driver in gas costs.

  23. jj says:

    I’m thinking all that funny money the Fed has been printing is what’s driving the price of gas up.I see crude prices falling and gas prices going up,so I think it’s more than crude prices driving gas up.There must be more money around that most economists think,for everyone to be driving as much as they are,here in So California,with gas about $4.19 gallon.

    • Jim says:

      I like how all of your arguments are completely related, it’s like you’re just throwing up a bunch of things you read on the news and seeing what happens. :)


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