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Why Is Gas Suddenly So Expensive?

| 6/24/2008 11:18:35 AM

Gas PricesOuch! Why is gas suddenly so expensive? What's going on? 

Cole Turner
Detroit, Michigan

These days, we’re all feeling more pain at the pump. Even before summer began in 2008, we’d already seen new records for the price of oil (a few cents short of $140 a barrel) and the price of gas (national average of more than $4 per gallon).

Just as you would suspect, as goes the price of oil, so goes the price of gas. According to the Energy Information Administration of the U.S. Department of Energy, the cost of crude oil accounts for 73 percent of the per-gallon price of gasoline. Here are a few of the many factors behind the recent surge in oil prices:

Supply versus demand. Here in the United States, the world’s most oil-addicted nation, demand has actually declined by about 1 percent. But growth in worldwide demand has more than offset that tiny dip. From 1990 to 2006, oil consumption from China and India has increased 216 percent and 114 percent, respectively. That pace is ahead of production, which is declining, particularly in non-OPEC countries (such as Mexico and Russia) that produce about 60 percent of global supplies. If and when “peak oil” will arrive remains hotly debated, but it’s crystal clear that the era of easy and cheap oil is over.

No new refineries. There hasn’t been a new oil refinery built in the United States since 1976. Why? They take billions of dollars and a decade or more to bring up to speed. With rising demand for alternatives to gas, and growing public pressure about global warming, oil companies are uneasy about investing in new refineries.

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