Why Is Gas Suddenly So Expensive?

Reader Contribution by Staff
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Ouch! 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.

The decline of the dollar. Worldwide, oil is traded in dollars. With the greenback on a sharp decline against other currencies, foreign investors can buy more oil, which further fuels the fire of oil prices. As oil becomes more valuable, some investors buy it rather than stocks or property. In short, oil is the new gold.

Big oil “biggers” its profits? In 2007, the top five oil companies combined reported $123 billion in profits. A growing number of people, beyond environmentalists, are clamoring for a variety of responses, such as a windfall tax, an end to federal subsidies that support the oil industry, and/or requiring investment in renewable energy. For its part, big oil says its profits are not that different from other industries and it is doing everything it can to keep gas affordable.

Blame us treehuggers? Oil companies and their friends like to blame rising gas prices on environmental groups and their allies because they resist drilling in public lands such as the Arctic National Wildlife Refuge (ANWR). But America simply can’t drill its way to energy independence: Even the Bush administration’s research states that opening up ANWR would only lower gas prices by 1 cent … in about 20 years.

What you can do. Realize that globally we still have relatively affordable gas: We pay less than half what British, French and German drivers pay. Nevertheless, the bar for U.S. gas prices has been raised?–?$4-per-gallon gas is no longer a distant possibility. Some analysts predict oil prices of more than $200 a barrel by 2012, which could translate to $7-per-gallon gas. If you have an SUV and don’t really need it, sell it now. Next time you’re car shopping, choose the most fuel-efficient vehicle you can afford that meets your everyday needs. Don’t fall for dealer gimmicks that pay for your gas when you buy a gas guzzler?–?you won’t save money over the long term. And support higher fuel economy standards, increased investment in public transportation and a national, urgent emphasis on developing renewable energy.

— John Rockhold, managing editor. Find him on .

Photo by IStockPhoto/Ann Marie Kurtz