Why are gas prices rising, and just how high will they go this year?

As the people of the Middle East flex their underdeveloped democratic muscles, the oil merchants are nervous and their nerves are costing us far more money at the pump. It is clearly time to reduce my use of gasoline and other products made from crude oil. (We just added a minivan to the fleet for the hauling of our little ones, which will pull them from the SUV and reduce our family average MPG by about 10. We may need to do more as soon as it’s possible).

Before we get into a gas pricing discussion, where can you get the cheapest gas where you live? Check out the lowest prices in your area in the last 24 hours, at Gas Buddy. As you’ve undoubtedly noticed, you’ll find the prices to be a good 50 cents higher a gallon than just a few weeks ago.

To understand why prices fluctuate, let’s look at who we are paying when we spend a dollar on gasoline. 

According to the U.S. Department of Energy, on the average (this varies from state to state), here’s approximately where each dollar you spend on gas goes:

  • Crude oil: 67 cents
  • Taxes: 15 cents
  • Distribution and Marketing: 11 cents
  • Refining: 7 cents
  • Service stations (a few cents)

How Stuff Works looks at this breakdown in more detail.

Crude oil – The biggest portion of the cost of gas 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). The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $35 per barrel (1 barrel = 42 gallons or 158.99 L) in 2004. And, after Hurricane Katrina, some prices were almost double that. In April 2008, crude-oil prices averaged around $104.74 per barrel. During that month, the price of oil reached a record price of almost $120 a barrel.

Taxes – Federal and state governments each place excise taxes on gasoline. There may also be some additional taxes, such as applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Add that to the state excise taxes, and it can average 27.4 cents. It could be worse. In Europe, gas prices are far higher than in America because taxes on gas are much higher.

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.

Refining costs – The cost of refining diesel fuel can be considerably higher than the price of refining regular gasoline. To learn more about oil refining, read How Oil Refining Works.

Station markup – Of course some of the money you spend at the pump does go to the service station. While some consumers blame high prices on station markup—and service stations proprietors do make a final decision on what they will charge per gallon–they typically add on a only few cents per gallon. 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 that can afford to slash prices at select locations.

Service stations are charging for today’s gasoline at a price that will enable them to pay upfront for the next tanker of gasoline and supplies after that. They are making a prediction of how the other, larger players will price the goods and services that will determine how much it will cost the service station to add future gasoline to their inventory. 

Here’s how gas prices have changed in the last 30 years:

Average U.S. Gasoline Prices

Year

Price Per Gallon

1980

$1.22

1985

$1.96

1990

$1.22

1995

$1.21

2000

$1.56

2001

$1.53

2002

$1.44

2003

$1.64

2004

$1.92

2005

$2.34

2006

$2.63

2007

$2.85

2008

$3.32

2009

$2.40

March 2011

$3.38

  Source: U.S. Bureau of Labor Statistics Consumer Price Index (CPI). Average Price Data, Gasoline All Types.

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.

Prices are increasing at the pump this week because various links in the chain perceive that oil will cost more as Libya and the entire Middle East continues to churn (not what crude costs today). But according to the International Energy Agency, the world should be able to deal with a disruption of Libyan crude. Libya produces about 1.6 million barrels a day; a sizable amount but just a fraction of the world’s overall 87.5 million barrel-a-day appetite.

Ordinarily, if oil supplies were tight, a 1.6 million barrel-a-day disruption would certainly be a problem. But the recession has left oil stockpiles near all-time highs. Oil stockpiles are crude supplies owned by oil companies, distributors or refiners that are stored in on-shore tank farms or offshore on ships.

Americans could see gasoline pump prices spiking 10% to 18% higher in coming weeks as a result of the unrest in the Middle East — but they’re unlikely go above $4 a gallon — unless the uprisings spread to Saudi Arabia, AOL’s Daily Finance reported.

Nonetheless, “we’re going to see gasoline prices going higher in the next week, the next month and maybe in the next six weeks,” says Tom Kloza, chief oil analyst at Wall, N.J.-based Oil Price Information Service. He forecasts a price in the range of $3.50 to $3.75 a gallon, for a gallon of unleaded regular gas. However, Kloza says he “disagrees vehemently” with analyst predictions that gas prices could shoot above $4 or even $5 a gallon.

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About Jim Jewell

I am a writer and consultant on faith and public life, active for many years in management and communications in the evangelical community. I now work as the director of the nonprofit practice at The Valcort Group (www.valcort.com). Everything on this blog, however, is my personal opinion and is not read or approved before it is posted. Opinions, conclusions and other information expressed here do not necessarily reflect the views of Valcort.
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