What makes gas prices go up
or down?
- Supply
and demand.
- Supply. The
supply of both oil
and gasoline can
not be increased
very much. Most
oil producers are
pumping near capacity. (For
example, OPEC is
within about 10%
of capacity right
now.) Gasoline
refineries are
also near capacity
and there are no
new refineries being
built (although plans
for a refinery near
Yuma, Arizona are
progressing).
- Demand. The
demand for oil is
soaring worldwide. China,
for example, is using
oil at almost twice
the rate economists
expected (but the
rate appears to be
slowing). With
all this competition
for oil, the price
is being driven up. 45%
of the oil we use
in the United States
goes for motor fuel.
- Speculation
in the futures markets.
- Oil
and gasoline
are commodities
that are traded
on the futures
markets. Whenever
anything happens
to make traders
think the price
will go up (or
down) they react
accordingly. This
means oil and
gasoline price
are not always
directly related
to consumer demand
or to the cost
of producing
gasoline (these
are called the
'fundamentals'. An
act of violence
in the Mid-east,
a refinery accident
clear across
the country,
or even an unsubstantiated
rumor, can change
wholesale prices
and force retailers
to raise prices
at the pump.
Why
are prices different in different
areas?
- Proximity
to refineries and supply.
- It seems
that prices should
be cheapest near ports
and refineries because
transportation is less
expensive and supplies
are plentiful, but
it doesn't always work
that way. Environmental,
regulatory, and contractual
issues can often have
a greater bearing on
prices than production
and transportation. For
example, California,
which has plenty of
ports and plenty of
crude oil, has the
most expensive gasoline
in the country, due
largely to its stringent
clean air requirements.
- Environmental
Regulations
- There
are over 20 different
blends of gasoline
in various parts of
the country, all intended
to help clean the air. All
these blends cost more
to refine than plain
old unleaded gas. Some
are more expensive
than others, so prices
vary depending on the
formulation.
- Competition
- Competition
takes place on many
levels in the petroleum
industry -- crude oil
production and sale,
shipping, refining,
transport of finished
gas, and of course,
your local gas station
retailer. Generally,
prices are a little
better in areas with
many major oil companies
competing for your business...just
like all other industries.
- Contracts
and Competition
- Service
stations usually maintain
some kind of contractual
relationship with a
major gasoline supplier. This
can make it difficult
for some stations to
compete on price because
they are tied to a
contract. For
example, suppose Station
A buys gas at a lower
spot (wholesale) price
today, so it lowers its
retail gasoline price. Station
B might wish he could
drop his prices, but
can't afford to because
he is locked into a
contract to buy gasoline
at a higher wholesale
price. Until
that wholesale contract
ends, Station B can't
afford to lower his
retail price.
- Speculation
in gasoline futures
- Since
some gasoline is traded
on futures markets,
speculators can affect
prices. It's
a little like the crude
oil futures market,
or the stock market. Sometimes
price changes are driven
by events as far away
as the Middle East,
by rumors, or by perceived
supply disruptions.
- Taxes
- Yes,
they matter. Taxes
in the United States
average about $0.42
per gallon (in Arizona,
$0.374) and typically
make up 15-20% of the
cost of a gallon of
gas. In most
states taxes are about
evenly split between
state and federal taxes. Taxes
account for the difference
between the relatively
low gasoline prices
in the U.S. and high
prices in Europe and
many other countries,
where gasoline can
cost over $4.00 per
gallon. The average
French or Italian family,
who drive small cars
fewer miles each year
than their American
counterparts, may pay
the equivalent of $2,000
per year in gasoline
taxes.
Arizona
Perspectives
-
Most
of Arizona's gasoline
is reformulated Arizona
Cleaner Burning Gasoline
(Arizona CBG) which
the EPA mandates must
be used in Maricopa
County to meet clean
air standards. Arizona
CBG is somewhat
more expensive to produce
than conventional gasoline,
which adds to the cost
in the Phoenix metropolitan
area.
-
Tucson
uses a special oxygenated
fuel only in the winter.
-
The
rest of the state uses
conventional unleaded
gasoline.
-
Usage. The
state uses about 7.3
million gallons (173,000
barrels) of gasoline
per day. A little
under 5 million
gallons (110,000 barrels)
are used in Maricopa
County alone.
-
Should
Arizona have a refinery? Most
AAA members think so. In
a 2003 survey, about
89% of AAA members said
yes...if all environmental
concerns are met. A
company called Arizona
Clean Fuels has
proposed a $2 billion
refinery near Yuma and
has purchased land to
build it.
-
There
are options other than
a refinery. Expanded
and additional pipelines
are under consideration. The Longhorn
Pipeline from Houston
to El Paso is completed,
giving Arizona access to
additional gasoline from
refineries in the Houston
area. It meets up
with the Kinder Morgan
East Line, which is being
expanded from 8" to
12".
Gasoline
Refineries: Capacity
and Margins
- Over
the past three decades,
almost half the 300 refineries
in the U.S. have been
closed. These
closures were primarily
due to business decisions
by the oil industry or
to government-mandated
closures or sales due
to mergers (of course,
the mergers themselves
are business decisions).
- Although
refineries are much more
efficient than they used
to be, over the past 15
years or so, there has
been a net loss in refining
capacity of about a million
barrels per day. Some
argue that the industry
is deliberately squeezing
supply in order to raise
the price of gas. While
this might seem unfair,
it is not illegal unless
the refining companies
are colluding (working
together) to set prices
or shut out competitors. A
number of national legislators
and attorneys general have
investigated and, to this
date, found no evidence
of illegal activity.
Perspective
on refinery margins:
Sometimes, refiner's margins
(the amount refiners add
to the price of gasoline)
are well above their usual
average, which usually
gets a lot of attention
from the media. But,
in fairness we must point
out that margins are below
average more than they
are above. The refining
business is very volatile
with short periods of extremely
high margins, then longer
periods of average or below
average margins. This price
volatility is very
upsetting to the public,
so, if refiners are manipulating
the market, you'd think
they'd find a more subtle
way of doing it! |
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