Nov 9th, 2007

 

Chris Fournier

Gasoline:  Volatile stuff both chemically and economically

 

 

 

 

 

 

 

 

Do you ever find yourself dreading the inevitable trip to the gas pump? Do you ever cringe as you see the price meter spins at over triple the rate of the gallon meter?  If so, you’re not alone.  Millions of Americans are starting to feel the crunch as gas prices continue to rise. As I write this the national average for a gallon of regular gasoline is $3.01 according to the Energy Information Administration (EIA).  So what is going on?  Before we go there lets first take a look at the breakdown.  A year old NPR study analyzed the cost breakdown for gasoline.  Using the price of 2.90 /gallon the cost breaks down like this:  1.60 for the crude oil, 0.64 for refining, 0.55 for tax, and finally 0.11 for marketing.  Based on these figures we can clearly see that crude oil, the very basis for the entire supply, is the dominant factor in gas price (Horsely).  

 

 

Now that we understand crude oil’s major role in the price of gasoline lets examine the market for crude oil.  Over the past 15 years the demand for crude oil world wide has grown.   Today the US now consumes over 20 million barrels of oil daily.  On top of that China and India’s consumption has increased.  The world’s suppliers of oil find themselves pushing their capabilities to meet world demand.  Setbacks in this area include Iraq’s oil production dramatically decreasing after the 2003 invasion (Horsely).  The law of supply and demand is clearly at work here.  Government investigations as to whether or not oil companies are manipulating the market artificially have come up empty handed. Commodities such as crude oil are volatile and driven by what the market is willing to pay at a given time.  A quick glance at the below chart shows us that the world is hungry for oil and despite climbing prices is willing to pay more and more.(Margreaves).

 

 

 

Oil refineries are right behind the price of crude oil when it comes to high gas prices and account for 22% of the total cost of gas at the pump.  Prices in the US tend to jump up right before the “summer driving season”.   US refineries attribute this price hike to exceeding refining capacity.  Lately these refineries have started to invest in more capital to increase gasoline output, but they have not been able to keep up with demand. For example the US consumed just 17 millions gallons of gasoline daily in 1995.  In 2005 that number more than doubled to 36 million gallons a day.  Considering that the last refinery built in the US was in 1976, its no wonder the price has been steadily increasing (Margreaves).

 

 

References

Horsely, S (2006) “Q & A: What’s Behind High Gas Prices” Retrieved Nov 8th 2007.  http://www.npr.org/templates/story/story.php?storyId=5365439

Margreaves, S (2007) “Behind High Gas Prices:  The Refinery Crunch” Retrieved Nov 9th 2007.  http://money.cnn.com/2007/04/17/news/economy/refineries/index.htm

 

The Big Picture (2004) “Crude Oil Demand and Gasoline” Retrieved Nov 9th 2007.

http://bigpicture.typepad.com/comments/2004/09/crude_oil_gasol.html

 

Energy Information Administration (2007) “Gasoline and Diesel Fuel Update” Retrieved Nov 8th 2007.  http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp