The price at the pump suddenly skyrocketed 10 cents today, and the reporter on the news says that crude oil prices went up $3 per barrel.
You know that sounds bad, and you know you're spending more money on gas today than you did yesterday. However, like many people, you're left scratching your head wondering why the cost of gas and crude oil fluctuate so drastically and so often.
Let's face it, the media explains it all day and we still don't have a clue.
What Affects Crude Oil Prices?
Crude oil prices are mostly determined by supply and demand. We have a lower supply, due to the fact that oil is a non-renewable resource we're literally burning through at an alarming rate - thus, the demand is high. Furthermore, our supply is regulated which also affects the cost of oil.
Because crude oil is a non-renewable resource, oil companies do not compete with each other when it comes to pricing. In most corporate circles, offering the best product at the lowest price is how you get and retain customers. However, within the oil industry, this would be unwise because if oil companies compete with each other, prices go down significantly and their non-renewable money maker is burned up much faster.
It's a simple fact that, when something's cheap, we buy and use more of it. We just can't help ourselves.
This is why OPEC regulates the cost of crude oil at around $70/barrel to keep things stable. If the cost per barrel goes too far below $70, the supply will become depleted more quickly. However, the higher the prices get, the more likely foreign countries are to drill for more oil, thus adding to the supply.
Twenty percent of the world's oil is consumed in the United States, and 2/3 of the country's oil is used in transportation. That's right - our cars, trucks, and SUVs are sucking up this non-renewable energy producer faster than home heating, electricity, and plastic production combined!
This is why many say that we are "addicted" to foreign oil.
Why foreign oil? Because we have many restrictions on domestic drilling here in the United States. This has also affected prices dramatically. If we were able to drill within the United States, supply would go up and prices would go down.
In addition, oil is used for so many different products that the costs increase for that reason as well. Crude oil makes jet fuel, diesel, home heating oil, and plastic shopping bags, among other things. The need (or want, in the case of shopping bags) for oil to make these products in addition to gasoline also affects crude oil prices.
How Do Crude Oil Prices Affect Gas Prices?
Fifty percent of what we pay for gasoline at the pump deals with crude oil. This includes crude oil prices, getting the oil out of the ground, moving it to refineries to refine the oil into various products. The rest of the cost of gasoline is the result of moving the gas to gas stations, costs to run and maintain the gas stations, and taxes. In fact, taxes account for 25% of the cost of gasoline.
Do you remember what we said about supply and demand before? Part of supply and demand deals with what the public is willing to pay for something. If enough people become willing to pay $5.00 per gallon of gasoline, then we will see prices rise to that level. If we become stubborn enough to refuse to pay above a certain price, the oil companies and gas stations will have no choice but to reduce their prices for fear of bankruptcy.
Gas Price Trends vs. Crude Oil Prices in the United States
There are various reasons besides those listed above that contribute to high gas prices. For example, there aren't only 3 formulations of gasoline and one diesel. There are approximately 30 formulations of gasoline, each region having its own specific formulations set.
Because of this, if a refinery closes down, it makes it very difficult to make up for the lost gasoline. You can't simply move gasoline from North Dakota to Los Angeles, because the formulations are different. This short supply can cause prices to rise dramatically in Los Angeles, should this occur. There's a great deal of red tape to go through, and waivers that must be approved in order to move the fuel around the country, and this also contributes to higher prices.
Why Do Gas Prices Go Up Midweek?
This is a question we've often asked. Why is it, that, when you know your local gas station receives their gasoline at the beginning of the week, their prices suddenly increase mid-week once the media announces that the cost of crude oil has gone up again? Didn't they already pay for that gas? Why are they raising their prices?
The reason is because they are trying to run a successful business. In order to do this, you must anticipate future costs. If you know that your product will cost you more the next time you order it, you must make up for that additional pricing somehow. The only way to do that is increase your profits by raising your prices.
If gas stations didn't do this, we would see pumps shutting down all over town.
However, it's not all good news. While we see the prices go up at the slightest hint of crude oil prices rising, once oil costs go down, gas prices are much slower to fall. I think you and I both know the reason for that.
Why is Gas More Expensive in the Summer?
Summer gasoline blends are different than during the rest of the year, as they add corn produced ethanol to the mix to oxygenate the gasoline more than usual. This is necessary when the weather is warmer.
Because this takes additional work to produce the gasoline, the costs go up. In addition, ethanol is in short supply and has also contributed to higher gas prices during the summer.
In addition to the spike in prices during the summer months, ethanol reduces gas mileage. So you're paying more per gallon, and getting less miles per gallon. Ouch!
What Can Be Done?
There isn't one answer to that question. There are several suggestions and, in my opinion, they should all be explored and implemented before it's too late.
Drill for oil in the United States and offshore
Fund alternative sources of energy, such as nuclear, solar, wind, and water
Reduce consumption by sheer will
Support and expand hybrid and electric car technology
The reason is because they are trying to run a successful business. In order to do this, you must anticipate future costs. If you know that your product will cost you more the next time you order it, you must make up for that additional pricing somehow. The only way to do that is increase your profits by raising your prices.
