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Q&A: What makes gasoline prices rise?

By Jonathan Fahey
AP Energy Writer


NEW YORK » Watching the numbers on the gas pump tick ever higher can boil the blood and lead the mind to wonder: Why are gasoline prices so high?

Many stand accused, including oil companies, the president, Congress, and speculators on Wall Street. Others assume that the earth is just running out of oil.

The reality, economists say, is fairly simple, but it isn't very satisfying for a driver looking for someone to blame for his $75 fill-up. Last year, the average price of gasoline was higher than ever, and it hasn't gotten any better this year. The average price nationwide is $3.88 per gallon, the highest ever for March. Ten states and the District of Columbia are paying more than $4.

Q: What determines the price of gasoline?

A: Mainly, it's the price of crude oil, which is used to make gasoline. Oil is a global commodity, traded on exchanges around the world. The main U.S. oil benchmark has averaged $103 per barrel this year. The oil used to make gasoline at many U.S. coastal refineries has averaged $117 per barrel.

Oil prices have been high in recent months because global oil demand is expected to reach a record this year as the developing nations of Asia, Latin America and the Middle East increase their need for oil. There have also been minor supply disruptions in South Sudan, Syria and Nigeria. And oil prices have been pushed higher by traders worried that nuclear tensions with Iran could lead to more dramatic supply disruptions. Iran is the world's third largest exporter.

Q: How are gasoline prices set?

A: When an oil producer sells to a refiner, they generally agree to a price set on an exchange such as the New York Mercantile Exchange. After the oil is refined into gasoline, it is sold by the refiner to a distributor, again pegged to the price of wholesale gasoline on an exchange.

Finally, gas station owners set their own prices based on how much they paid for their last shipment, how much they will have to pay for their next shipment, and, perhaps most importantly, how much their competitor is charging. Gas stations make very little profit on the sale of gasoline. They want to lure drivers into their convenience stores to buy coffee and soda.

Oil companies and refiners have to accept whatever price the market settles on — it has no relation to their cost of doing business. When oil prices are high, oil companies make a lot of money, but they can't force the price of oil up.

Q: Are oil prices manipulated by speculators on Wall Street?

A: Investment in oil futures contracts by pension funds, mutual funds, hedge funds, exchange traded funds and other investors who aren't going to actually use oil has risen dramatically in the last decade. Much of this money is betting that oil prices will rise. It is possible that this has inflated the price of oil — and therefore gasoline — somewhat. But investors can also bet that prices will go down, and they do. Studies of the effects of speculation on oil markets suggest that it probably increases volatility, but that it doesn't have a major effect on average prices.

Q: Are politicians to blame for high prices?

A: Politicians can't do much to affect gasoline prices because the market for oil is global. Allowing increased drilling in the U.S. would contribute only small amounts of oil to world supply, not nearly enough to affect prices. The Associated Press conducted a statistical analysis of 36 years of monthly inflation-adjusted gasoline prices and U.S. domestic oil production and found no statistical correlation between oil that comes out of U.S. wells and the price at the pump. Over the last three years, domestic oil production has risen and gasoline prices rose sharply. In the 1980s and 1990s, U.S. production fell dramatically, and prices did too.

Releasing oil from emergency supplies held in the Strategic Petroleum Reserve could lead to a temporary dip in prices, but the market might instead take it as a signal that there is even less oil supply in the world than thought, and bid prices higher. Any price relief from a release of reserves would be temporary.

Politicians can, however, help reduce the total amount drivers pay at the pump. They could lower gasoline taxes and they can help get more fuel efficient cars into showrooms by mandating fuel economy improvements or subsidizing the cost of alternative-fueled vehicles. The first new fuel economy standards since 1990 are just now going into effect. Last summer the Obama Administration and automakers agreed to toughen standards further in 2016.

The U.S. fleet is now more fuel efficient than ever, and gasoline demand in the U.S. has fallen for 52 straight weeks. The U.S. is never again expected to consume as much gasoline as it did in 2006. That means that while drivers are paying more than they used to, they would have been paying much more if they consumed as much gasoline as they did in the middle of the last decade.

Q: Are prices high because the world is running out of oil?

A: Not yet. Prices are high because there's not a lot of oil that can be quickly and easily brought to market to meet demand or potential supply disruptions from natural disasters or political turmoil. Like most commodities, the need for oil is so great that people will pay almost anything, in the short term, to get their hands on what might be the last available barrel at any given moment.

But substantial new reserves of oil have been found in shale formations in the United States, in the Atlantic deep waters off of Africa and South America, and on the east coast of Africa. Canada has enormous reserves, and production is growing fast there. The Arctic, which is largely unexplored, is thought to have 25 percent of the world's known reserves.

All of this oil, however is hard to get and expensive to produce. That leads analysts to believe that oil will never stay much below $60 a barrel for an extended period again. As soon as oil prices fall, producers will stop developing this expensive oil until demand, and high prices, return. Current high prices have fueled a boom in oil exploration that is sure to bring more crude to the market in coming years. But it is not here yet, so for now, pump prices — and frustration — are expected to remain high.

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Publicbraddah wrote:
Nice article.
on March 22,2012 | 06:27AM
AmbienDaze wrote:
yeah agree, but it doesn't ease the pain...
on March 22,2012 | 08:08AM
kailuabred wrote:
Maybe Newt and Mitt should read this article. Better yet, have the public read it, so everybody can realize how stupid these 2 politicians sound.
on March 22,2012 | 06:47AM
Thegame wrote:
You should listen to how stupid the Secretary of Energy sounds.
on March 22,2012 | 06:55AM
Thegame wrote:
Where the hell did they get the info for this article?? There is more oil in the U.S. than all of the middle east combined. We want to be dependant on foreign oil.
on March 22,2012 | 06:57AM
Upperkula wrote:
Sure why not use all their oil first, leave ours for the days of ROAD WARRIORS.
on March 22,2012 | 07:43AM
all_fed_up wrote:
Good point. Never thought of it that way.
on March 22,2012 | 08:15AM
Dragonman wrote:
That is our national energy policy, the idea is for us to us up the worlds oil and only than tap into all of our oil reserves. The oil companies will make trillions when we have the only oil left on the planet.
on March 22,2012 | 09:35AM
Sunny wrote:
It's not just the price of oil that factor's into the price of gasoline, it's also the cost to refine the oil into gas. Gasoline consumption across the US has decreased as we move to more fuel efficient cars and trucks. Many refiners are losing money and have closed their plants, others are not able to refine the shale oil from Canada and the US without costly upgrades. Tesoro is losing money and closing their refinery on Oahu leaving us with only Chevron. As the US moves to alternate sources of energy and more efficeint autos you can forget about cheap gas but we will be less dependent on oil from the Middle East oil which we have been addicted to for too long.
on March 22,2012 | 08:04AM
Dragonman wrote:
If what you say is true than nothing we do short of finding a new energy source will save us. The more gas we use, the more demand and the price goes up. The less gas we use the demand goes down and its costs more to refine oil. Sort of like Hawaiian Electric. They give us all these helpful hints with our monthly bill so we can conserve on electricity than they raise the rates because it cuts into theri profits. Do we all believe this garbage ? or is it garbage ? confusing isn't it.
on March 22,2012 | 09:40AM
HD36 wrote:
The fastest way for politicians to lower gas prices is to lower the taxes on gas.
on March 22,2012 | 08:41AM
Dragonman wrote:
Great idea but they won't do it, without taxes they won't be able to cash their pay checks.
on March 22,2012 | 09:42AM
Beaglebagels wrote:
With regards to speculation on the commodities market, oil gets some special treatment compared to other commodities. The market for oranges for example is 80% either producers or distributors of oranges, at the most 20% of the market are nondeliverable speculators. The other 80% are actually in the orange business. The Oil market is limited to 40% nondeliverable speculation, which introduces more banks, hedge funds, currency speculators etc. Additionally the New York Mercantile exchange is not the only trading point for oil contracts, the ICE controlled by 5 banks and 5 oil companies may handle as much as 1/3 of worldwide oil futures trading. The financial crisis of 2008 led to banks needing cash fast, dumping their oil futures investments on the market and plummeting the price from $140 to $30 per barrel. Plus all worldwide oil trades are made in US$, which has been weak for a very long time.
on March 22,2012 | 09:33AM
Tipops wrote:
Quick answer, follow the MONEY!
on March 22,2012 | 10:33AM
stanislous wrote:
Politicians voted in the 10% ethanol feel good legislation... that's caused nothing but problems and higher prices. Vote it out.
on March 22,2012 | 01:20PM
nodaddynotthebelt wrote:
This is a really good article. Our country needs to look for alternative to oil for energy. Our state is not doing enough to make alternative energy feasible. Photo-voltaic power has been available for a while now but it seems that it is too expensive and out of reach of the average consumer. We need to make tax breaks available that are worth the effort and financial costs to the public. Our state is receives a lot of sunlight and is ideal for photo-voltaic panels. These panels can produce much of our electrical needs. Many who live in apartments do not have that option due to the fact that the landlord has to decide on that. But for homeowners it is possible to take advantage of solar energy. It seems that HECO does not really go for that option. They could build solar panels over stretches of land that are not used. The government could purchase or make available land that could be used for that option.
on March 22,2012 | 02:15PM
tts429 wrote:
BS Article, liberal media bias to protect Obama and Democrats from accountability. BS, "politicians can't do much to affect prices". How much in Federal & State Taxes in the price per gallon? Why is this buried in the price at the pump? Why is taxes not dislosed at the pump? What do Politicians do with these Taxes? Liberal Media Journalism to protect tax and spend Democrats!!!
on March 22,2012 | 04:59PM
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