Pump Rage: Why Is the Price Going Through the Roof?

Posted on May 5, 2012


Ask anyone what the most troubling aspect of the shaky economy and he will tell you it is the high price of gasoline. Nationwide, gas prices average $3.95 per gallon and some experts expect it to top $4.00 before it shows any sign of decreasing. There are many reasons for this rise, many of which relate to supply and demand.

On the supply side, the majority of the world’s oil supply is controlled by the Organization of Petroleum Exporting Countries. OPEC sets production caps for each of its member countries in an effort to keep the price of oil stable and high, with the largest producers being Saudi Arabia, Iran, and Venezuela. Through this quota system the price will never drop to the point where the member nations stop making a profit.

Tankers and Shipping
After the crude oil is drilled in the OPEC and other countries it is shipped to the US in a limited number of supertankers totaling only 136 deadweight tons, and although the actual cost of transportation is only approximately three cents per gallon of gasoline, any form of oceanic transport creates a bottleneck that further limits supply of refined gasoline.

Limits on Refining and Blending
Once the crude oil is imported into the United States it then needs to be refined and over the last 30 years the number of operating refineries has decreased from 254 to 137. Once the oil is distilled, various components are blended together to make gasoline, but the actual ingredients of gasoline are mandated by the state and local governments under guidelines by the 1990 Clean Air Act, and most refineries are limited in the number of blends they can produce at a time. To make matters worse, the blends change as the seasons change, with the most expensive blends, required in the summer, adding between 5 and 15 cents a gallon. This limited number of refineries also limits the supply of gasoline available to the United States market.

The Demand Side of Things
Demand has as much influence on the price of gasoline as supply and as the demand increases it is inevitable that the price rises as well. As the weather warms up, the demand for oil products increases. Also of concern is that while over the last twenty years the amount of gasoline produced has only increased by about 21 percent the number of vehicles that use gas in the United States has increased by 30 percent creating a sizable increase in demand for gasoline.

How the Value of the Dollar Affects the Price at the Pump
Crude oil is a global commodity and the price of that crude oil accounts for 72 percent of the price of the refined gasoline, and therefore the cost of a barrel of oil in US dollars is the largest factor contributing to the price of gasoline. As a corollary to that, the amount of oil that one dollar can buy affects the price in the US market. When the dollar was a stronger currency, then a single dollar could buy more oil than it can today. The value of the dollar compared to the Chinese Yuan has decreased over the last 20 years by 12 percent and compared to the Pound Sterling the dollar has decreased by 10 percent.

Rage against the Big Oil Companies and Their Record Profits
Interestingly enough, the largest target of rage, the oil companies, actually hold little blame in the rising cost of a gallon of gasoline. It seems that politicians and commoners alike want to blame Big Oil for the woes and Congress is quick to site the profits that the oil companies earned, $137 billion in 2011 alone, but those same politicians fail to mention that the actual health of a company is measured in its profit margin not the raw profits it earns. The profit margin is a percentage of net income in relation to total revenue and it helps to discount the volume of product sold. The oil companies made such large profits because worldwide many people bought their products, but the profit margin for oil companies was only 6.2 percent, half that of the entertainment industry and one eighth that of the magazine and newspaper publishing industry. In fact, the oil industries only earn two cents on every gallon of gas sold in the US, compared to almost 50 cents of taxes paid for every gallon.

Gasoline is an expensive product, but it is one that has become necessary in today’s modern world. The price will continue to fluctuate, but as any economist will attest, as the price rises, demand will fall. This will help to lower the price somewhat after a spike, but how much is anyone’s guess.

With the price of gas going through the roof, you should consider cutting down unnecessary costs wherever possible. Go online today to http://www.kanetix.ca to do a vehicle insurance quotes comparison to see which insurance provider can offer you the most competitive rate. Kanetix Ltd. has helped millions of Canadians save time and money on their insurance since 1999.

Posted in: Finance