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Entry bubble Why Are Gasoline Prices So High?

By: Jake | May 26, 2008 | Category: Money

My post last week about saving money on gas had many of you asking why the price of gasoline was so high. You weren't the only ones.

Congress brought executives from oil companies to Capitol Hill last week and asked them to explain the price hikes. Unfortunately, there weren't too many clear answers. I'm not an oil expert or economist, but in this post I'll try to shed light on why gasoline prices are high.EIA Gasoline Price Chart

The Energy Information Administration (EIA) of the Department of Energy (their job: to provide neutral data regarding energy in the U.S) says the cost of crude oil is the main contributor to the price of gasoline. Crude oil accounts for 70% of the price at the pump. According to the EIA, the spot price of West Texas Intermediate crude oil, which is the U.S. benchmark for light, sweet crude oil, has risen steadily from $101.54 per barrel on March 31 to a record high of $128.93 per barrel on May 20.

The main reason for crude oil's price increase is high worldwide demand. Countries like China (especially with the recent earthquake) have increased their imports of petroleum. Political events and conflicts in oil producing countries also affect the price. What's more interesting is that crude oil is traded worldwide in U.S. dollars and since the value of the dollar is declining, it causes the price of crude to go up.

In the EIA's "This Week in Petroleum" published May 21, they project prices will go up in June and will rise as long as the price of crude oil keeps increasing. The report adds that the usual Memorial Day and summer travel season increase in demand should be lower due to higher prices, but this will not have too much of an effect on price since millions will still travel. Policymakers have proposed lowering or repealing gas taxes, but it's not certain how much this would lower the price.

As long as the price of crude oil continues to rise, we'll be paying more for gasoline. Let's hope gasoline will never cost more than a gallon of beer or ketchup.

| View Comments [21] | envelope E-mail This Entry | Tags: economy   fuel   gas   gasoline   jake   oil   world  

Comments (21):

blue comment bubble Posted by weisongtao on May 26, 2008 at 03:57 PM EDT

blue comment bubble Posted by ME in Texas on May 27, 2008 at 10:08 AM EDT

Your little pie chart shaped like a gas pump, was cute and I am sure many people over looked some missing facts

1. How much is made in profit per gallon? Who is making these profits. If the prices listed are true than please explain how all the oil companies are making record profits. I think over 90% of the 73% use in bring oil is clear profit.

2. The price of a barrel of oil is high because Our Wonderful Brave War-Chief is threating another war where the oil is shipped from.

3. The drop in the value of the dollar is because we are printing money at record speeds.

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blue comment bubble Posted by Jake on May 27, 2008 at 10:39 AM EDT

Me in Texas,

Thank you for sharing your opinions. The chart is not mine, it's from the EIA, when your mouse rolls over it, a little flag should appear and tell you that.

I can't really discuss oil profit policy in this forum, but I can lead you to things that can inform your opinion. Here's an article from ABC about whether or not oil companies should be making profits with the price of crude oil rising.

http://abcnews.go.com/Business/IndustryInfo/story?id=4749343&page=1

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blue comment bubble Posted by Don Brennan on May 27, 2008 at 01:29 PM EDT

Are not the futures traders the ones driving up the cost of a barrel of oil? They are purchasing futures at a higher than normal demand because they have discovered that they can artificially drive up the price by their own speculation. The unfortunate part is that they have discovered that there is no ceiling, they will drive the economy straight off the cliff-- just so they can make a profit-- and the edge is much closer than they think-- or of course- care about.

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blue comment bubble Posted by I_ask_Y on May 27, 2008 at 01:59 PM EDT

Every one says it the oil companies who are making the windfall profits. I ask this…
1 Why is when the price of crude oil goes up FOR NEXT DELIVERY, the price of gas goes up within two days?
2 When the price of crude oil drops, we do not see the lower price until the higher priced crude oil has been use.
3 Who owns the refineries? Is it the oil companies? To me the refineries are making the windfall profits.
4 Who sets the price for the crude oil? I have not heard of the Oil companies saying… You must pay me X dollars for my crude oil. To me it looks like the speculators are driving the price up. Each is making sure he (or her) has the crude oil for its market.

I_ask_Y
PS: I ask a question because I do not know the answer.

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blue comment bubble Posted by almann55@hotmail.com on May 27, 2008 at 02:05 PM EDT

it is convenient to forget one of the main reasons that we are in this oil crises. bill clinton vetoed drilling bill that included anwar and of shore drilling .greenpeace and others have effectly blocked coal gasification and neclear reactors. we can't allow the elletist and misguided to ruin our economy and in turn our country. when is america going to wake up? the future might well be in algea farms for bio fules. i would like to see some articles on this research . thank you for your time

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blue comment bubble Posted by Citizen Jmaximus on May 27, 2008 at 02:35 PM EDT

I know your going on what the energy department stats say, but when the price of oil drops, there is not a direct correlation. When oil goes up, it [gas] goes up within seconds, when oil goes down there is no corresponding drop. Why is there always a refinery shutdown during summer? This smells of collusion and profiteering.

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blue comment bubble Posted by dkharley on May 27, 2008 at 07:53 PM EDT

The ever increasing price of fuel will impact the entire eco/social way of life in this country. Our economy is in part, designed on a model of mobility. This involves the mobility of commerce (goods and services) including personal vehicle, rail , truck, shipping,Business travel,(personal vehicle ,air, public transportation ), and recreational travel,(personal vehicle, air, rail, bus etc. ). The effect of the consumers ability to choose the frequency of this mobility, based on needs and expenses, will greatly impact this model of mobility and force our economic machine to either stall completly or under go a paradigm shift unlike we have ever witnessed.

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blue comment bubble Posted by Cookie56 on May 27, 2008 at 08:11 PM EDT

I wholey agree with your comments Citizen Jmaximus. Whether new investors are playing games with the stock market or the price of crude in rising, gasoline products having been rising steadily for years and drops only momentarily to psych out investors as well as consumers to believe you're saving money or opportunity is ripe for buying and selling stock. It's a game; a very expensive one but we have to learn how to adapt and play our part (consumers) using alternative measures.

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blue comment bubble Posted by LarryP on May 27, 2008 at 09:45 PM EDT

I've been listening to the pundits(so called) talk about the current crisis in our country . Mortgage and now oil . All the talk has been about people getting over their heads with high priced homes and high gas using cars . These are all things that these very pundits would have told us was good for the economy . Whether they were good for the economy or not . Unscrupulous people out there take advantage for the things that people want . A home , a good job and and transportation to get there . Now people are being vilified for wanting these things . I used to talk about there being a special place in hell for people like these . They have no shame . It has become a fad to be heartless and mean spirited . People are starving while we argue about the viability of gasohol .Shame on us .

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blue comment bubble Posted by john6457 on May 28, 2008 at 04:35 AM EDT

why is it cheaper in mexico. i thought this was worldwide, lets get our oil from south america, not the middle east

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blue comment bubble Posted by Jake on May 28, 2008 at 10:11 AM EDT

Lots of good comments and I wish I could comment to each of you, but it's been busy here in the office this weel. I am looking at doing a post on alternative fuel methods for Monday. Unfortunately, I don't think there's anything people can use today but it'll be nice to know what's out there.

Your comments about investors got me thinking about what was out there on the financial markets effect on oil prices. I found this testimony given to Congress back in December of 2007. It's a 20 page Word Document that talks about the history of the oil market and it's evolution. It's a long read, but it may answer some of your questions (and probably make you think of more). :)
Title of Paper:
Financial Energy Markets and the Bubble in Energy Prices:

Does the Increase in Energy Trading By Index
And Hedge Funds Affect Energy Prices?

http://energy.senate.gov/public/_files/Krapels_Testimony_Dec2007.doc

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blue comment bubble Posted by steve on May 28, 2008 at 10:22 PM EDT

Oil prices is going to keep rising untill everyone has to quit their jobs cause they can't afford to buy gas to go to work. the oil companies are just price gouging cause they have been let go to do what ever they want too long and they will ruin the world to where no one can have anything.

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blue comment bubble Posted by shannan on May 29, 2008 at 05:17 PM EDT

A while back, the government subsidized the price of diesel fuel to keep transportation costs at a level where truck operators could afford to transport the goods consumers need and thereby, consumers could afford to buy those goods. Is there any chance that the government will do this again?

I hear over and over again that one of the major reasons that prices for food and other goods are going up is the high cost of taking the goods from the grower/manufacturer to the stores.

Just curious if there was any plan in the works like this.

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blue comment bubble Posted by David and Susan on May 29, 2008 at 05:45 PM EDT

Well, look on the bright side. A 16oz. bottle of water costs $1.29.
That is $10.32/gal. A bottle of whiteout costs $0.99. that comes to
$62.75/gal But printer ink is more expensive than gold. It's $21.00 for .5oz. that is $5,376.00/gal. So I'm glad my car isn't an HP.

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blue comment bubble Posted by Jake on May 30, 2008 at 08:27 AM EDT

Don,

Congrats on making it through that document! It does reveal a new wrinkle to the oil price equation.

Shannan,

There has been talk about subsidies and things, but nothing that I have seen has come down the Senate.

David and Susan,

It's definitely good that our cars don't run on printer ink. It's amazing how quickly 5 ounces of printer ink runs out though. :)

Check back Monday for a post on alternative fuels.

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blue comment bubble Posted by link360seo on June 03, 2008 at 11:45 PM EDT

Something funny for a very not funny situation.
http://video.google.com/videoplay?docid=2685196715390771582&q=Why+Are+Gasoline+Prices+So+High%3F&ei=NA9GSKH2MorQrgPym-XCDA&hl=en
I don't think links are allowed here, so copy and past.

Link360seo.com

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blue comment bubble Posted by zulma on June 06, 2008 at 10:14 PM EDT

Where can I find a bycicle with an integrated motor (no gas integrated) to be able to use as my everyday transportation?
Iam 65 and don't want so much pedaling.

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blue comment bubble Posted by Ihatethecostoffuel on June 10, 2008 at 05:06 PM EDT

I hate the cost of fuel. I am a 100% service connected Veteran, I can no longer work. I can't afford to go to my Doctors appointments because of the price of gasoline. The VA does pay travel but that only goes so far.

What are pour people to do? We have to drive to get places of great importance to our health and other things.

I also believe the price of fuel is increased because of our greedy president; Oil man trying to make a buck before he is out of office, or for some reason trying to destroy our country.

I can see riots in the streets because of food prices so hi people will starve our country will turn in to a third world country, that doesn’t care if its people starve or not.

Mr. FBI I’m not instigating anything, I’m just stating what I think will happen.

God bless the people of this country because the government doesn’t care. They took welfare away from people that need it. As the saying goes the richer get richer and the pour get pourer.

Stop the damn war and get a clue Mr. worthless President.

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blue comment bubble Posted by lincolntyler on July 15, 2008 at 05:29 PM EDT

This is a bunch of BS!!!. I think that over 90 percent of the $4.10 per gallon of gasoline is pure profit. The gas companies are just a bunch of crooks! They are ripping America and the World off cause they know that most of us need the gas to get to work so they know that we will buy it. The goverment needs to step in and regulate the prices. Some might say it is "unconstitutional" but if the goverment can regulate and take away our constitutional right to bare arms then why can't it regulate gas prices!!!!!!

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blue comment bubble Posted by jake on July 16, 2008 at 08:30 AM EDT

lincolntyler,

Don't know if you know this, but many people said the Supreme Court upheld the right to bear arms a few weeks ago when they said the DC handgun ban was unconsititutional. Read the decision here.

http://www.supremecourtus.gov/opinions/07pdf/07-290.pdf

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