RKMBs Forums .::Important::. Politics and Current Events Who's to blame for higher gas prices?

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Today's high gas prices have many roots

By Kevin G. Hall, Knight Ridder Newspapers

WASHINGTON - You're at the gas pump, fuming about $2.25 or more for a gallon of regular unleaded. Who's getting rich off you, how'd prices get so high, who's to blame?

Not your local convenience store, where three-quarters of Americans buy their gas. Shop owners make a penny or two per gallon. Their bonanza is inside the store, not at the pumps. They're feeling your pain because Americans are spending on gas what they used to spend on Snickers bars or Slurpees.

The most obvious villains are the giant oil companies and rich oil countries such as Saudi Arabia. But they're just two pieces of a complicated answer to why the price at the pump is so high.

Other villains include, in no particular order: you, environmentalists, the weak dollar, government regulators, Wall Street investors, China and other developing nations. All played a role in creating today's high gas prices.

For starters, many major metropolitan areas have passed laws requiring special summer blends of fuel that are less likely to evaporate in hot months and cause smog. These special blends generally are introduced about now, in early spring, and trigger price increases of roughly 30 cents a gallon during the warmer months in many parts of the country.

"This is the average we have seen every year since 2000, and it is exactly what we have seen so far this year," said Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va.

The biggest reason pump prices have risen is the surging global price of crude oil, which is refined into gasoline. Crude oil prices are set on international markets, where price generally is determined by old-fashioned supply and demand. When a product is in short supply, people are willing to pay more for it.

Oil isn't a finished product but a commodity. That adds a wrinkle to the supply-and-demand explanation. It's traded in contracts for future delivery, and these contracts are bought and sold like stocks.

Also like stocks, the perception of risk can be as much a factor as the underlying supply-demand fundamentals in determining the value of oil. Some buyers of oil contracts are users of oil or gas who seek to lock in prices now out of concern that they might rise later. Others are investors who trade in oil as speculators, trying to guess a trend they can get rich from.

Oil prices are being driven up by investors who think the price will go higher in the future. In many cases, they might be acting for you.

"The oil market, believe it or not, is being fueled by your pension fund," said Philip K. Verleger, a noted oil economist in Aspen, Colo. "For more than a decade, investment bankers have been advising pension funds to put 10 percent or 11 percent of their assets into commodities."

The New York Mercantile Exchange last month reported an all-time high in trading for crude oil-futures contracts. Regulators said noncommercial traders, pension funds and the more speculative hedge funds accounted for 34 percent of the contracts last month.

Then there's you, the consumer. Gas-guzzling SUVs help make the United States the world's largest consumer of oil, at 21 million barrels a day. Americans will consume 1.7 percent more gasoline this year than last despite the higher prices, the Energy Information Administration estimated Thursday. It's the analytical arm of the Energy Department.

India and China also are stretching supplies, as fast-developing nations. China is on course to equal today's U.S. consumption of oil by 2020. While the United States imports oil mainly to power vehicles, China imports it to power industry. China's industrial growth, in great measure, is tied to the strong U.S. economy that buys its exports. American consumers pay China's oil bills.

"We're the ones buying the goods from China. It is driving their increased demand for energy," said John Giglio, an oil expert and the executive director of the National Association of State Energy Officials in Alexandria, Va.

Meanwhile, the supply of oil, industry analysts said, is growing at only 2 percent a year. Refineries are running at 90 percent capacity or more. There's no margin for error.

"There is no cushion in the market to absorb any unexpected changes in supply and demand," said Guy Caruso, the head of the Energy Information Administration. Saudi Arabia reportedly pledged this week to pump oil up to the limits of its matchless production capacity in an effort to calm market nerves, but so far markets haven't much reacted.



A single event - such as a strategically placed bomb in Iraq or Saudi Arabia, or sabotage at a U.S. refinery - could spark global shortages.

"We're used to an oil market that if Iraq goes down or Nigeria goes down, Saudi Arabia and other producers can cover it. We don't have that anymore," said Rick Mueller, an analyst at Energy Security Analysis Inc. in Wakefield, Mass.

The potential for scarcity drives up the price of oil.

The weak U.S. dollar is another reason that gasoline costs more. Oil is traded in dollars, and the dollar has lost 15 to 20 percent against most major currencies. Oil companies and producing nations have raised prices to compensate for the dollar's slump.

Your loss at the pumps is the gain of oil-rich nations and global oil giants.

Big oil companies posted record profits last year and should grow even flusher this year. Oil companies will occupy three of the top 10 spots when Fortune magazine releases its ranking of the top 500 publicly traded companies Monday.

Exxon Mobil Corp. ranks second, behind only Wal-Mart. Exxon posted sales nearing $221 billion in 2004, a figure roughly equivalent to the economy of Greece. Fortune ranked it the most profitable company on its list, with $21.5 billion in profits, a staggering figure larger than the economies of Madagascar and Iceland combined.

ChevronTexaco Corp. and ConocoPhillips ranked 7th and 8th, respectively. ChevronTexaco saw its net income - or profit - jump to $13.3 billion in 2004, almost twice its 2003 take.

Oil-producing countries also get rich, by requiring the oil companies to cut them in on the deal. Norway, the world's third largest oil exporter, is thought to have the world's highest standard of living, thanks to oil income. Booming oil prices brought Norway a 19 percent increase in oil exports last year, to $38 billion.

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Source: U.S. Department of Energy

Let's look at where your money goes when you pay for gas:

• Crude oil - The biggest portion of the cost of gas -- about 45 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices rose to as high as $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2000(Source: U.S. DOE).Sometimes, gas prices go up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no on actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S., have to undergo costly retooling to handle it.
  

  
  

• Refining costs - The refining of crude oil makes up about 13 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.
  

  
  

• Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketing the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for about 13 percent of the price of gasoline.
  

  
  

• Taxes - Taxes, including federal and local, account for about 31 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 20 cents per gallon. There may also be some additional state sales taxes, as well as local and city taxes. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6 per gallon, with 78 percent of that going to taxes.
  

  
  

• Station markup - In order to stay in business, service stations have to add on a few more cents to make a profit. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.
  

Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.

World events, wars and weather can also raise prices. Anything that affects any part of the process, from the moment the oil is drilled, through refining and distribution to your car will result in a change in price. Military conflicts in parts of the world with lots of oil supplies can make it difficult for oil companies to drill and ship crude oil. Hurricanes have damaged offshore drilling platforms, coastal refineries and shipping ports that receive oil tankers. If a tanker itself is lost or damaged, or leaks its oil into the ocean, that will put a dent in the market as well.

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The Time Trust said:
You Americans have the cheapest gas prices in the world, so stop complaining.

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rex said:
This is one of the few reasons I like taking the bus.
$35 dollars a month and it goes everywhere I need to go.

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rex said:
I live in a college town so most the people here are too poor to have a car.

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rex said:
This is one of the few reasons I like taking the bus.
$35 dollars a month and it goes everywhere I need to go.

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Paul Mandral said:
Oil is supposed to spike to $100.00 a barrel soon which'll mean $4.00/gallon gasoline.

Good.

Maybe those gluttons in their military vehicles, which they desperately need in order to carry their 2 bags of groceries from the market to their home, will put more thought into what is essential and what is just wasteful.

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wannabuyamonkey said:

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Paul Mandral said:
Oil is supposed to spike to $100.00 a barrel soon which'll mean $4.00/gallon gasoline.

Good.

Maybe those gluttons in their military vehicles, which they desperately need in order to carry their 2 bags of groceries from the market to their home, will put more thought into what is essential and what is just wasteful.

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What do you drive and what milage do you get?

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Captain Sweden said:
I wonder what the effect a world-wide terrorist strike against oil refineries and oilfields would have on the world economy. A new depression, maybe?

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how come no one gets upset about the 50-70 cents (or more) per gallon in taxes imposed by government?

Federal (18.4 cents per gallon), state (35-50 cents per gallon), and local motor fuels taxes (anywhere from 5-10 cents or more per gallon) account for at least one-third of the per-gallon cost of gasoline -- an outrageous levy in both absolute terms and as a percentage of the purchase price of the item being taxed. Imagine, for instance, if you had to fork over 50 cents in taxes for every $1 or so of groceries you purchased.

And gasoline is no less an "essential" than food for most people.

These taxes are also viciously regressive -- that is, they take more as a percentage of disposal income from the least able to pay. After all, most of us have no choice about driving, regardless of our income. People in areas outside of major cities (where there is no public transport system) especially. The "rich" (a frequent whipping boy of class warfare types) may be able to afford the exactions without it affecting their day to day lives. But what of the person of modest means?

Let's assume a gas tax (all levels) of 50 cents per gallon. (A lowball figure, by the way; in some states, e.g. Connecticut and New York, combined motor fuels taxes imposed by all levels of government can push $1 per gallon or even more.) A purchase of 15 gallons of fuel (the amount it takes to fill the typical new car's tank) would entail $7.50 in taxes alone. Most people burn a tank of fuel per week (at least), so that means $30 per month down the rathole, just for gas taxes -- or $360 per year.

How many people do you know who can afford to lose nearly $400 annually without it affecting their budgets?

And yet, they (our friends in government) hunger for even more.

Since 1997, 14 state legislatures have voted to raise their state gas taxes a total of 17 times; these increases ranged from 1 cent per gallon in North Dakota to 6 cents a gallon in Ohio. Many local (county/city) governments around the country tack on "inspection fees" and other nit-picky taxes -- including a "seawall tax" in Mississippi and a "special petroleum tax" in Tennessee. (Click here for more details.)

There is talk of adding a nickel (or more) to the federal gas tax, too. Some lawmakers want another 50 cents per gallon (or even more than that).

And yet, no one complains much about this endless, brazen highway robbery -- which comes after, let us not forget, federal and state income taxes which together snatch anywhere from 15-40 cents of every dollar we earn right off the bat. So with the change left over, we're compelled to pay yet again -- and then again. And at confiscatory rates, too.

Hawaii is about to scrap its effort to legislate away high gasoline prices, after the state's "gas cap" law failed to lower prices at the pump and led to claims that the regulation cost drivers tens of millions of dollars since it went into effect in September.

"It's farcical, to be honest," the president of a gas station chain on the islands, Richard Parry, said in an interview yesterday. "Everyone sort of says, 'This obviously hasn't worked.'"

In a vote earlier this month, only one of Hawaii's 51 state representatives voted to retain the cap. Even the state senator who led the drive to institute the cap last year has endorsed the idea of suspending the cap indefinitely, though he has also proposed modifying the price controls so they would only kick in under certain conditions.

A study released in February by the state's Department of Business, Economic Development, and Tourism concluded that the caps cost consumers as much as $55 million.

Mr. Parry said the caps encourage wholesalers to hike gas prices. "It's a natural business decision that if you're not sure if you can make money when the prices go down, I better make money when the prices go up," he said. "What happened is the market basically follows the cap. A bunch of independent decision-makers come up with the same logical choice."


Mr. Parry said he was sympathetic to the lawmakers' desire to see lower gas prices, but didn't think they could fend off the economic forces at work. "You can't pick a piece of the market and regulate only that," he said. Mr. Hamilton contends that the gas cap may not have failed at all, but may have headed off even greater increases in price.

The cost of diesel fuel, which is not covered by the cap, jumped in Hawaii by about 70 cents since last year, he noted. "It's not been in effect long enough to tell what it's done," said the analyst, who works with independent station owners often at odds with the oil companies.

Hawaii's house has voted to address the price concerns by lowering gas taxes by 8 cents a gallon, but proponents of the gas cap have not given up on it altogether. The latest proposal from the state senator who initiated the legislation, Ron Menor, calls for adding Singapore's wholesale spot prices to the three mainland prices already included.

The most expensive price would be dropped from the average in order to weed out local disruptions like hurricanes in the gulf. The cap, which already includes local adjustments for the costs of transporting fuel among Hawaii's six main islands, would be triggered only if prices exceed the "fair price" target over a two-week period.

Mr. Parry said the escalating complexity of the caps and targets will only bring more volatility in what has traditionally been a stable market

"It's artificially trying to emulate a free market and there's just no way government can effectively do that. We've proven that in the last six months," he said.

Soaring demand is pumping gas prices sky-high and has left America poised for a major fuel crisis this summer, watchdogs said yesterday.

An industry expert warned any supply breakdown could trigger shortages more drastic than the aftermath of last year's devastating hurricane season, which crippled Gulf Coast pipelines and caused prices at New York pumps to approach $4 a gallon.

"All that has to happen is another Katrina-like event, or political factors in the Middle East, and we are looking at major, major disruption," said Robert Sinclair, a spokesman for AAA's Automobile Club of New York.

Oil markets are already jittery following terrorist attacks on oil facilities in Nigeria and rising tensions over Iran's nuclear program.

Both countries are major oil producers.

U.S. Energy Department forecasters warned that fuel costs - nudging toward $3 a gallon in New York - would climb an additional 10 to 15 cents by Memorial Day, one of the year's busiest driving weekends.

Last week, it already cost motorists 40% more to fill up their tanks than it did the same time last year.

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the G-man said:
Ready for another energy crisis?

Soaring demand is pumping gas prices sky-high and has left America poised for a major fuel crisis this summer, watchdogs said yesterday.

An industry expert warned any supply breakdown could trigger shortages more drastic than the aftermath of last year's devastating hurricane season, which crippled Gulf Coast pipelines and caused prices at New York pumps to approach $4 a gallon.

"All that has to happen is another Katrina-like event, or political factors in the Middle East, and we are looking at major, major disruption," said Robert Sinclair, a spokesman for AAA's Automobile Club of New York.

Oil markets are already jittery following terrorist attacks on oil facilities in Nigeria and rising tensions over Iran's nuclear program.

Both countries are major oil producers.

U.S. Energy Department forecasters warned that fuel costs - nudging toward $3 a gallon in New York - would climb an additional 10 to 15 cents by Memorial Day, one of the year's busiest driving weekends.

Last week, it already cost motorists 40% more to fill up their tanks than it did the same time last year.

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sweetmarlene said:
That's it! I'm buying a bicycle! I live in the Midwest, where gas prices don't seem to be quite as bad (compared to the coasts)

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thedoctor said:
If the demand for gas is still going up despite the price hikes, is it really the oil companies' who are to blame for their profits. They have to make a profit in order to keep running. If they sell more every year, they're going to make more profits, period. Simple math. I have yet to see anyone show that the oil companies are the ones driving up the cost themselves. It's mainly the market setting the price.

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