Friday, June 3, 2011

Why are Gas Prices so HIGH?

What is causing gas prices to get so high? At first glance the April retail sales seemed to be good news. They are 7.6% higher than last year. So what is driving the increase? Unfortunately it is higher gas station sales, which are due to higher gas prices. Gas station sales are up a staggering 21.8% over last year! Higher prices are painful, but they do encourage greater consumer spending. Especially on something that is a necessity like gasoline. If you think gas will be $4.50 next week you will very quickly fill your tank up with the $4.00 a gallon gas this week.

Filling up at the pump is causing American consumer's increasing pain in the pocket book. Just when you think gas prices are going down they shoot back up again. The rising cost in crude oil, and the increasing cost in refining are helping to cause the increase in gas prices. But at the same time the big oil companies are reporting record profits. They are being accused of price gauging by the Democrats. So what is really going on here. What is really causing gas prices to get so high?

What we pay for in a gallon of gas:  all figures below are approximations

Crude Oil - 55%
Refining - 22%
Taxes - 19%
Distribution & Marketing - 4%

The biggest culprit in the rising cost of gas is the rising cost of crude oil. With crude oil trading over $100 a barrel gas prices will continue to be high. Another big factor in the price of gas is the refining costs. Our country needs more refineries. These factors account for part of the reason  gas is so high. Big oil companies make the bulk of their money by producing crude oil. They invest in oil fields with the expectation of making a profit at lets say $30 a barrel. When oil hits $100 a barrel the rest is just pure profit to them. This is kinda like a farmer who plants a crop with the expectation of making a profit at lets say $1.25 a bushel. If the market starts trading at $3.00 a bushel he is not going to sell if for cheaper. He is just going to keep the profit and be thankful for the good market price of his crop. The farmer is not price gauging, he is just selling his product at market price. This is what the oil companies are doing. They are selling their product at market price.

So who sets the market price on oil? The global market does. The increasing demand for oil, much more than just ten years ago is helping to create higher crude oil prices. China and India are growing their economies and dramatically increasing their demand for oil. With the demand for oil growing quite steadily, and a middle eastern supply system that is very unstable, you have a recipe for high oil prices.

So what if we opened up ANWR to drilling? That would add to the global oil supply, estimated by the Energy Department, about 1 million barrels of oil a day. That is almost, for example, what Iraq produces each day. This would help increase the global supply of oil and in turn bring prices down some. But even if this were to be allowed to start today it would be years before this new supply would hit the markets. Drivers in other countries have it worse. They are still paying more in European countries. Oil rich countries on the other hand are paying less than a dollar a gallon.

Finally Obama's energy policy is in large part to blame for high gas prices. Find out more about this in part two of this post to follow later.

Related Posts:

Inflation - Thanks Obama!
Taxes on Miles we Drive
7 ways to Save Money at the Pump
Rising Gas Prices/Declining Dollar


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