Why are gas prices high, and what can we do about it?

The national average price for a gallon of regular unleaded gasoline is one penny short of its all-time high (adjusted for inflation), at $3.22 per gallon. That’s about $1 per gallon higher than early last November. In recent years, it reached $3.04 in September of 2005, and $3.00 in August of 2006.

Q: Why are gasoline prices so high?

A: We’re approaching the summer driving season, crude oil prices have gone up, and some refineries are offline.

  1. There is a normal seasonal increase in demand for gasoline that occurs every Spring. As the Energy Information Administration says, “When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer, when people drive more, and fall in the winter. Good weather and vacations cause US summer gasoline demand to average about 5 percent higher than during the rest of the year. If crude oil prices remain unchanged, gasoline prices would typically increase by 10-20 cents from January to the summer.” It’s not Summer yet, but some of the recent increase is a result of the increase in seasonal demand.
  2. The price of crude oil usually accounts for about half of the price of a gallon of gasoline. So when oil prices go up, gasoline prices quickly follow. Crude oil is now about $65.80 per barrel, up about $11 from its average in January.
  3. In addition, more refineries were/are unexpectedly offline this year. After the cost of crude oil and taxes, refining costs are typically the 3rd biggest component of the price at the pump. Refineries go offline every Spring for maintenance, but this year, unexpected problems at some refineries mean that our national refining capacity is running about 4% lower than would be typical for May. This raises the price of refining (called the “crack spread”), which raises the price of gasoline at the pump. (At the moment, high refining costs have supplanted taxes as the 2nd biggest component of the gasoline pump price.)

Although inflation-adjusted gasoline prices are near their all-time high, those high prices have less of an effect on the economy, and on a typical family budget, than it has in the past. Why? Because incomes are higher then they were decades ago, and so the high gas prices accounts for a smaller proportion of our national income, and of a typical family’s budget.

Also, even the near-record prices are unsurprising to the experts (I’m not one) — as the world economy grows, and as developing countries buy more cars (think China and India), long-term worldwide demand for oil is high, and it will stay high for the foreseeable future. And the seasonal increase has certainly been expected. High prices are unpleasant, but only the jump in refining costs is a big surprise.

Still, high gasoline prices are painful for everyone, and especially those with low incomes, largely because it’s hard in the short run to avoid the price increase — most people can’t move or buy a new car, so you’re generally just stuck paying more for gas.

Q: So what can the government do about it?

A: In the short run, almost nothing. In the long run, the President has proposed to:

  1. lower demand by increasing fuel economy standards (“CAFE”), and also to reform the way those standards are measured, to encourage sound science, safety, and keep costs low
  2. increase our domestic oil supply by drilling for more oil, both in the Gulf of Mexico and off the Alaskan and Virginia coasts (these are already underway), and in Alaska (we need Congress to change the law)
  3. increase our supply of alternative fuels by expanding something called the Renewable Fuel Standard, mandating that more of our fuel come from ethanol (from corn and, eventually, other plant sources), and expanding it to include other alternatives like electric vehicles, plug-in hybrids, and coal-to-liquids
  4. increase our insurance policy by doubling the size of the Strategic Petroleum Reserve. The SPR is a few big holes in the ground where the nation stores oil, just in case there’s a severe supply disruption
  5. and, most importantly, encourage the development of new technologies on both the supply side and the demand side. The President has proposed increased federal R&D funding for cellulosic ethanol, batteries and plug-in hybrid vehicles, and even a “Hydrogen Fuel Initiative” in the long run.

#1, #3, and #4 are the President’s new “20 in 10” proposal that he rolled out in the State of the Union address this year. Together, they would reduce our gasoline usage by up to 20% within 10 years (by 2017). If you want to learn more about our “20 in 10” energy proposal, you can find a good description here.

The solutions take years to have a big effect. We’re urging the Congress to take those long-term actions now. It’s taken years to get to this point, and it’s going to take us years to work our way out of it. But that’s no excuse for not starting now.

I may also explain why East Coast residents are probably paying about 10¢-12¢ per gallon less than the national average, and those on the West Coast are probably paying 9¢-20¢ per gallon more than the national average.

By | 2017-12-09T10:36:04+00:00 Wednesday, 23 May 2007|