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Gasoline Prices: Why So High, and What to do?

May. 15, 2012 3:00pm

Kenneth P. Green is a resident scholar at the American Enterprise Institute. Green has studied energy and energy-related environmental policy for nearly 20 […]

Kenneth P. Green is a resident scholar at the American Enterprise Institute. Green has studied energy and energy-related environmental policy for nearly 20 years. An environmental scientist and policy analyst by training, Green’s recent studies include the efficacy of green-jobs programs, drivers of oil and gas prices, the Deepwater Horizon oil spill, the embedded energy costs in consumer goods, and resilient policies to address the risks of climate change. He has just published his second supplemental textbook, “Abundant Energy,” a concise guide to energy and energy policy intended for a college audience. In addition, Green has testified before regulatory and legislative bodies at the local, state and federal levels, including many times before the U.S. House of Representatives and the U.S. Senate. He was also a designated expert reviewer for two reports by the United Nations' Intergovernmental Panel on Climate Change.

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kgreen@aei.org

Author's Website

Once again, high gasoline prices are in the news. As of this writing, the national average gasoline price per gallon price is hovering around $3.79. The price pinch at the pump is sparking consumer and voter discontent. SymphonyIRI reports, “57 percent of consumers are feeling increased financial strain when gas prices increase, and more than four in ten say high gas prices make it difficult to meet monthly expenses,” based on polls conducted in the second quarter of 2011. Further, 49 percent of consumers plan to reduce grocery spending if gas prices climb another 50 cents. An Associated Press-Gfk survey conducted February 16-20, 2012, found that 58 percent of respondents disapproved of how President Obama has handled gas prices. On March 6, 2012, or “Super Tuesday,” seven out of ten primary voters said gas prices were an “important” factor in their decision making.

So what’s behind gas prices?

Oil Supply and Demand

The primary reason for high gasoline prices, as any economist will tell you, is very simple: world demand for oil is strong, and the supply is limited. The cost of crude oil dominates the price of gas: in January 2012, it represented 76 percent of the price.

Risk also influences the world price of oil. Unrest in the Middle East is a perennial cause of worry over world oil supplies, and explicit threats by Iran to close the Straits of Hormuz can’t be promoting confidence in oil consumer markets.

Another source of supply uncertainty is the moratorium that the Obama administration has slapped on U.S. development of domestic oil production in the last two years. Since the Deepwater Horizon oil rig disaster in 2010, U.S. domestic oil production has slowed significantly, especially in the Gulf of Mexico. The permitting slowdown as a result of the spill is estimated to have cost the United States $4.4 billion in output costs, 19,000 jobs, $1.1 billion in wages, and over $500 million in federal, state, and local government lost tax revenues.

Taxes

The tax bite in a gallon of gasoline is nearly equal to the costs of refining, distribution, and marketing combined. That fluctuates, of course, because most gas taxes are percentage based. At $3.79/gallon, taxes account for about 53 cents.

Green: Gasoline Prices: Why So High, and What to do?

Source: http://www.eia.gov/energyexplained/index.cfm?page=gasoline_factors_affecting_prices

A Fractured Market

In order to fulfill air pollution reduction plans in states and localities across the country, gasoline sold in the United States has been fractionated into about 17 different boutique fuels sold in dozens of discrete markets. With three grades of gasoline per fuel, refiners are producing over 50 separate blends. Such boutique fuel requirements both increase price volatility and the height of price spikes as a function of the distance-to-market of boutique fuel producers and consumers, according to the Energy Information Administration.Boutique fuel requirements also increase the absolute price of gasoline sold in boutique markets, according to the U.S. Government Accountability Office.

Escalating Refinery Costs

Another factor contributing to the increased price of gasoline is the reduction in the number of operating refineries in the United States over the last 30 years. The number and capacity of U.S. refineries peaked in 1981, and, since then, 171 plants have closed, although the remaining plants have increased output to offset a loss of production. Though most of this reduction has been caused by the low profit potential of refineries, but others see a significant cause in “extremely tight environmental restrictions, not-in-my-back-yard community opposition, and the high cost of new construction.” Refinery profit margins have played a role in recent gasoline price hikes. The EIA suggests that “The sizable jump in retail prices this year reflects not only the higher average cost of crude oil compared to previous years, but also an increase in U.S. refining margins on gasoline (the difference between refinery wholesale gasoline prices and the average cost of crude oil) from an average of $0.34 per gallon in 2010 to $0.45 per gallon in 2011 and $0.42 per gallon in 2012.”

A Weak Dollar

In recent congressional testimony, Robert Murphy, of the Institute for Energy Research observed: that: “From its peak in March 2009, the dollar has fallen 17 percent against other major currencies. Therefore, holding everything else constant, the dollar depreciation alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars)….It is on the basis of such calculations that a recent Joint Economic Committee report estimated that Federal Reserve policies have added almost 57 cents to the price of a gallon of gasoline for American motorists.

But what about those speculators?

While speculation has been shown capable of causing short term-price spikes in the past, Cato Institute scholars Jerry Taylor and Peter Van Doren show there is little evidence that speculation is a cause of oil price hikes since 2005. They find that rather than increasing price volatility, it turns out that speculation increases after price volatility manifests, and tends to damp it down: only two out of 26 studies of speculation they surveyed showed increased price volatility after the onset of futures trading in commodity markets, while 14 out of 26 studies showed a decrease in commodity price volatility after trading markets were introduced.

Understanding what goes into the price of gas is key to understanding what the government could do to lower gasoline prices. Contrary to the claims that the president can’t do much to lower the price of gasoline, rapid-response options include implementing tax holidays; relaxing/waiving boutique fuel requirements that fragment markets; and relaxation, suspension, or simplification of environmental regulations raise refining costs. Longer-term options include increasing domestic production, strengthening the dollar, and sending coherent policy signals that might reduce perceived risks to world oil market stability.

Kenneth P. Green is a Resident Scholar at the American Enterprise Institute. This column is derived from “Why are Gasoline Prices High (And What Can be Done About it?)

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Comments (10)

Rembrandt
Posted on June 5, 2012 at 12:51pm
The government makes about TEN TIMES MORE PROFIT from the sales of gasoline than the people who work for it do. When ever you see a HEADLINE about the BILLIONS in PROFITS that the oil companies make, just multiply that times TEN….FEDERAL TAX per gallon 18.4 cents…STATE TAX per gallon 35.3 cents…SALES TAX 2.25% of every dollar spent…In California that’s OVER 63 cents PROFIT to the do nothing GOVERNMENT! Government “officials” get TAX PAYER GAS CARDS & CARS for “FREE”…

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Rembrandt
Posted on June 5, 2012 at 12:40pm
The “Oiled Birds” article appeared in the L.A. Times on March 1st or 2nd, 2012 & has to do with the pollution caused by the OIL SEEPS from the ocean floor in the Santa Barbara Channel. California democrats are DIRECTLY to BLAME for the waste & pollution due to their actions in July, 2009, assembly vote to DENY private sector action to clean it up & make use of the wasted, natural energy source. Democrats are helping OBAMA to destroy America.

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Rembrandt
Posted on June 5, 2012 at 11:03am
OILED BIRDS Bakersfield Californian, pa. A4, Saturday, March 3,2012 This is the ONLY article that I’ve seen about the ENVIRONMENTAL DAMAGE that is directly facilitated by the democrat party. (“birds coated with oil seeping from the ocean floor”, “more than 100…in the last two months.”) In 2009 the city of Santa Barbara, 2 environmental groups & Venoco Oil Co. were forced to ask “permission” from the democrat run government to horizontally drill the oil out in order to clean up their water, provide jobs, increase tax revenue, lower unemployment, stop the wanton waste of our natural resources, lower gasoline prices & save the birds. Then, in February, 2009, lieutenant-governor, John Garamendi, democrat, said NO, because he was “protecting the environment”. In July, 2009 the full-time assembly democrats voted NO & then voted to ERASE THEIR VOTE from the record. The article also stated that “6,600 gallons of oil a day seep from the ocean floor in the Santa Barbara Channel”. Democrats are NOT protecting the environment while wasting our resources & destroying California. If Republicans were doing this, we would wonder if they were being bought off by Arab Oil interests, or owned stock in solar/wind energy companies like Solindra who was given $525 MILLION by OBAMA. How ANYONE can support democrats who behave like this is insanity.

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Rembrandt
Posted on June 5, 2012 at 10:50am
OBAMA & the DEMOCRATS are deliberately destroying America. They are using the oil spill to continue shutting down American efforts to use our own natural resources for energy independence, while lying about saving the environment & becoming free from foreign imports. Look up NATURAL OIL SEEPS online to see just how much oil & natural gas seeps are polluting our air & water on a daily basis. Estimates range from 20 to 25 TONS; or approximately 600 GALLONS of oil PER DAY; & up to 5 MILLION CUBIC FEET of NATURAL GAS escapes PER DAY, just at COAL OIL POINT off the coast of Santa Barbara, California. In February, 2009, DEMOCRAT, lieutenant governor, John Garamendi & again in July, 2009 the DEMOCRATS in the California assembly refused to allow the capture of the wasted oil & natural gas that is continuing to pollute our water & air & the DEMOCRATS claim that they’re “saving the environment”… The only way to stop the pollution is to drill it out; to relieve the natural pressure that is pushing these natural resources to the surface & into our water & air. The DEMOCRATS obviously, have some twisted agenda to build an ever bigger, uglier, freedom sucking GOVERNMENT that takes our ability to drive a car or other transportation, Independent of their complete control, in the name of “alternative energy” & saving the planet! You will not find any record of the DEMOCRAT Assembly’s no vote on drilling out the leaking gas & oil because they voted to erase their vote 5 minutes a

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MAMMY_NUNN
Posted on May 22, 2012 at 8:06pm
I would like to see the numbers of are exported oil nobody talks about are exported oil.

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progressiveslayer
Posted on May 22, 2012 at 7:09pm
Gas prices why so high? Government regulation plays a big role,California has several blends to protect the environment.Federal and state taxes on gas and the feds won’t allow construction of new refineries or allow the private sector to exploit the 1.5 trillion barrels of oil we have here in the states.

Oil is priced in dollars,when the dollar loses reserve currency status you will see change you can believe in,it won’t be some slogan from a skinny Marxist heathen,It’ll be gas so high no one can afford it.Remember folks,government IS the problem always has been always will be.

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- progressiveslayer
  Posted on May 22, 2012 at 7:47pm
  I forgot to add the solution,fire the Marxist heathen then we’ll exploit our natural resources like we should have been doing for years.More oil on the market and price goes down,reduce regulations and build more refineries.
  
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cemerius
Posted on May 16, 2012 at 1:24pm
“boutique fuels” Number 1 say farewell to ethanol!!! Takes 1.3 gallons of fossil fuels to produce 1 gallon of this FOOD!! IF some gas companies wnat to jump on the “band wagon” of the false prophets touting “man-made global climate change” they can by ALL means add this FOOD to their gas pumps!! For those of us that would rather eat FOOD, we can choose the MUCH cheaper pure gasoline stations!!! let the market decide and STOP with the Federal mandates!!!

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KidCharlemagne
Posted on May 16, 2012 at 1:27am
The U.S. is AWASH in crude oil right now:

—————————————————————
Crude inventories rise to 22-year high in survey
Bloomberg News
Apr 10, 2012

U.S. crude oil supplies climbed to the highest level for this time of year since 1990 on rising output and increased imports, a Bloomberg News survey showed.

Oil production grew to more than 6 million barrels a day, the highest level in 12 years, in the week ended March 30 and imports from Canada and into the Gulf Coast ballooned, according to the Energy Department. Supplies at Cushing, Oklahoma, the delivery point for futures traded on the New York Mercantile Exchange, have risen 38 percent this year.

Stockpiles at Cushing expanded 1.8 percent to 40.3 million barrels because of insufficient pipeline capacity from the site to refineries along the Gulf of Mexico.

“We’ll see another build in Cushing, Oklahoma,” Phil Flynn, an analyst at futures brokerage PFGBest in Chicago, said yesterday by phone. “There is no place for that oil to go.”

Domestic crude output climbed to 6.05 million barrels a day in the week ended March 30, the highest level since December 1999 and an increase of 7.3 percent from a year earlier.
http://business.financialpost.com/2012/04/10/crude-inventories-rise-to-22-year-high-in-survey/

The Cushing, OK storage facility is actually running out of space to store all that spare crude oil.

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A Doctors Labor Is Not My Right
Posted on May 15, 2012 at 10:57pm
Whatever individuals do in other countries with their own oil is perfectly fine, even if that would mean prices go way up: It’s not our oil. This should be the first thing we have straight.

As for the Strait of Hormuz, the Iranians’ threat to close it off is a RESPONSE to the U.S.’s threat to blockade Iran. And we threatened to blockade Iran because we THINK we have a right to tell other countries what they may or may not build.

Those in our government are wrong to suppose they have such an authority. They are the aggressors, in this case.

See here.

Closing Hormuz
http://lewrockwell.com/block/block193.html

As for the weak dollar, Peter Schiff supports this explanation primarily.

See here.

The truth about rising gas prices, the stock market, & Warren Buffett’s taxes
http://www.youtube.com/watch?v=eQYy25kLijA

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