Our transportation system also relies heavily on energy derived from petroleum products. A significant chunk of petroleum is refined to produce gasoline and diesel fuel—the two products which fuel all our major transportation systems: ships, planes, trains, and vehicles. We’ll examine the price of gas and oil, and look at possible alternatives to our current use of gasoline and diesel.
The Price of Gas
In February 2012, gasoline prices in the U.S. averaged $3.58, with the highest prices found on the West Coast ($4.20) and the lowest prices found in the Rocky Mountain states ($3.30). Even with a large jump in crude oil prices, other costs are responsible for the total price of gasoline. For the most recent prices, you can click here: Energy Information Administration. (This link is not required reading, but you may find it infinitely interesting, especially, if you drive and buy gas for your vehicle.)
On every slow news day that gas prices rise, the local news media and media across the country run a story about the sudden rise in gas prices. They send a reporter out, who listens to a few people gripe, whine, and moan, and the story does not accomplish anything.
So why do gas costs rise, and why is the price of gasoline change suddenly?
- Supply vs. Demand: Worldwide demand is high while supply is tight. Simple economics dictates that the price should go up. More people want to use gasoline and diesel than product is available. Demand increase is attributed to the economic growth of China and India, U.S. population growth, the switch by U.S. consumers to SUVs, and lack of energy conservation in the U.S. The $1 to $1.50 spike from Hurricane Katrina (33%-50% increase in price) is a result of this scarcity. As any business class teaches, when demand exceeds supply, you raise your prices or face shortages.
- Refining Capacity: Oil must be refined into gasoline. America has refining capacity deficit, such that we have to import refined gasoline (more expensive than refining it within the U.S.). No new refineries have been built in the U.S. for decades, yet demand has increased. Demand on the existing refineries is so high that an accident or maintenance operation at one facility can cause a spike in prices. Many refineries, including one near Evansville, are expanding where possible, but these expansions are not keeping pace with demand.
Environmental Rules: Some cities, states, and counties have implemented rules demanding specific ingredients be added to gasoline at the refinery to improve auto emissions. These rules further reduce the capacity of refineries, which have to shut down production to produce the specialized fuels. These shut downs reduce supply, which raises prices.Year Price 1950 $1.91 1955 $1.85 1960 $1.79 1965 $1.68 1970 $1.59 1975 $1.80 1980 $2.59 1985 $1.90 1990 $1.51 1995 $1.28 2001 $1.66 2005 $2.35 2006 $2.53 2007 $2.76 2008 $3.21 2009 $2.31 2010 $2.74 2011 $3.82 - Importation: Because the U.S. imports over 60% of its petroleum, gas prices are subject to additional transportation and security costs, and the whims of the countries that supply the oil.
- Taxes: About 10-30% of the cost of gasoline is taxes (depending on the state and local gas tax). The logic is people who use gasoline should be taxed to pay for the roads they drive on. The more your drive, the more roadways you use, the more tax you pay.
- Volatility: When a commodity, like gasoline, has a tight supply, strong demand, and uncertain supply, price volatility is created. With volatility, the price can rise or fall $.10 to $.30 in one day based on the personal whims of gasoline commodity traders. If the traders feel good, prices fall, if the traders feel uncertain, prices rise. A moderate supply disruption in a tight market leads to a huge price spike, as demand far exceeds supply.
Gas is one of the cheapest liquid commodities available, after publicly supplied water. Everything else we purchase, from Pepsi to bottled water to ketchup, usually costs more per gallon. Consider the information posted in the two graphs on this page.
The table (above, right) shows the price of gas since 1950 in terms of today’s inflation. The inflation adjustment allows us to see if the price of gasoline has outpaced inflation. In the case of gasoline, the price has remained stable or even fallen (U.S. Dept. of Energy). As many geologists have predicted - you may have realized -, gas prices won't be stable relative to inflation in the future. With supply not meeting demand, high prices in the $3-$5 range will remain (and continue to increase). For the most recent prices, you can click here: Energy Information Administration. You can also click here for a price breakdown and margin details. This will help you to see how much of the cost of gasoline is actually affected by fluctuations in the cost of crude oil. (These links are not required reading, but you may find them infinitely interesting, especially, if you drive and buy gas for your vehicle.) A 2011 AAA study, showed that the cost of owning and operating a vehicle increased by 3.4 percent in 2011 despite that costs of maintenance and insurance went down. Fuel and tire costs (both dependent on fossil fuels) are what caused the majority of the increase.
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Click for larger image. Graph showing the relative price per gallon of regular gasoline in 33 cities around the world and in the Midwest United States (Indiana) for June of 2010. Data were compiled from AIRINC’s June 30, 2010 survey and the United States Department of Energy historical data on gasoline prices.
The graph shows the prices of gasoline in U.S. dollars. Eritrea is a small country on the Red Sea, between the Sudan and Ethiopia. In June of 2010, gasoline prices were at $9.59 despite the area being very close to many oil producing countries. At the opposite end of the spectrum, gasoline prices for countries that produce much of the world’s oil tend to have low gasoline prices: Nigeria, Egypt, Kuwait, and Iran. Saudi Arabia and Venezuela are special cases: In these two countries, oil is produced by government-owned companies which keep local gasoline prices low to benefit the nation’s citizens. It’s the price you pay for having gasoline prices as low as $0.24 per gallon (Venezuela).
In Europe, gas tends to cost twice as much as in the U.S., $5-$6 a gallon. For decades, European countries have imposed high taxes on fuel to encourage conservation and fuel-efficient technologies and to fund usable public transportation. This has led to a decrease in fuel usage per capita in other countries while Americans per capita usage has remained flat or increased since the last gas shortage of 1979. In 2005, the U.S. led the world in per-capita gasoline usage with 428 gallons per person. (That means that, on average, each of us used 428 gallons of gasoline in 2005.) This was followed by Luxembourg at 358 gallons per person and Canada at 316 gallons per person. Eritrea, where gasoline is the most expensive, has the world’s lowest per-capita usage at 0.34 gallons per person (World Resources Institute). Click here for a full list. (The links in this paragraph are not required reading.)
Investing in Crude Oil? Are you a business major and are interested in tracking the global price of oil? The U.s. Energy Information Administration (U.S. EIA) put together an interactive document that explains “What Drives Crude Oil Prices.” You can see this explanation. The charts are updated monthly and quarterly. If you’re investing, you might find this explanation and tool helpful.
