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Why are Gas Prices So High?

Not 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 [3], 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 [4] offers the following illustration showing what goes into the cost of gas in the United States:

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 [5]. 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 [6], U.S. production has had little to do with oil prices:

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 [7])