Actually, big oil has little to do with it. Well then, who or what has caused the steep rise in the price of gasoline? A big part of it is the cost of crude so let’s start with that.
Observed in the news today on Yahoo! Finance:
Light, sweet crude for April delivery rose $2.24 to $107.92 a barrel on the New York Mercantile Exchange.
Crude oil is now priced at an all time high adjusted for inflation. A great many complex factors contribute which include, but are not limited to, the following:
- The supply is limited which makes it a seller’s market. Contrary to popular opinion, big oil (that is, the private companies) lost their power to regulate crude price once demand bumped up against supply (no more glut of oil on the world market) and OPEC flexed its collective muscle. Now the price is largely set by the oil producing countries. In many cases (Saudi Arabia, Russia, Iran, Venezuela, to name only four) these producer countries relish the high crude prices because the cash supports their home economies and keeps their populations reasonably content. At any point Saudi Arabia, for instance, could expand their production capability and produce a surplus which would bring down the global price if they had some reason to do that. One reason would be to thwart a budding U.S. alternate fuels program which would only be financially feasible if crude stayed above some breakpoint, e.g. $50/barrel. Those OPEC-ers don’t like competition!
- Some significant part of the cost of crude is due to it being traded as a commodity. Recently natural resources like oil and gold have been favored by investors. The price has been driven up somewhat by the petroleum traders at the New York Mercantile Exchange and other places.
- Finally, the falling value of the dollar contributes because petroleum is denominated in U.S. dollars. When foreign investors observe our current struggle with the credit crunch they may think that we are taking our eye of the inflation ball. That makes the dollar less attractive and its value drops. Since the inherent value of a barrel of petroleum has not changed, the cost of that barrel must rise to account for the lower value of the dollar.
Having discussed the cost of crude oil, what are some of the other factors affecting the price of gasoline at the pump?
All of the following facts and figures are available at the Energy Information Agency (EIA) website. This is an energy guru’s Nirvana.
- About 53% of the cost of a gallon of gasoline is due to the cost of crude oil.
- About 19% of the cost of gasoline is due to federal, state, and local taxes.
- About 19% of gasoline cost is due to refining costs. When Katrina knocked out some refining capacity and pipelines in 2005 gas prices spiked high but came down as repairs progressed.
- Another cost factor is suggested in the above item, namely “supply/demand imbalances”.
- If you are further from the refinery (Gulf coast) gasoline will cost more due to transportation.
The above contributors to gasoline price is an incomplete list. See “A Primer on Gasoline Prices” on the EIA website for the rest of the story. The following factoids are found elsewhere on the same website.
Factoid Number 1: The U.S. imports the majority of its petroleum and the country that supplies the most is Canada (surprised?). In fact, we import more from Canada than from all the Persian Gulf countries combined!
Factoid Number 2: The U.S. actually exports some crude petroleum. We ship 822,000 barrels per month (a relatively tiny amount) to Canada and they refine it and send it back.
Factoid Number 3: The U.S. exports some refined petroleum products. This goes by and large to Caribbean and Latin American countries that do not have sufficient refining capacity of their own.
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