Why Are Gas Prices So High?
When Else Have Prices Been as High
High gas prices are caused by high crude oil prices. That's because oil costs account for 72 percent of the price of gasoline. The remaining 28 percent comes from distribution, refining, and taxes, which are more stable. When oil prices rise, you can expect to see it at the gas pump six weeks later.
For example, oil prices hit a 30-month high in January 2018. Traders responded to the November 30, 2017 Organization of the Petroleum Exporting Countries’ meeting where members agreed to keep production cuts through 2018. They will remain above $62 a barrel through 2018.
As a result, gas prices will average $2.90 / gallon from April through September 2018. It's higher than the $2.41 / gallon averaged in 2017. Prices may go even higher now that President Trump withdrew the United States from the Iran nuclear deal.
Three Causes of High Gas Prices
Like most of the things you buy, supply and demand affect both gas and oil prices. When demand is greater than supply, prices rise. For example, U.S. shale oil producers increased the oil supply in 2014. Gas prices fell to their lowest levels in five years. But that shale oil boom reversed when low prices put many producers out of business.
Seasonal demand also affects oil and gas prices. You can expect them to rise every spring. That's because oil futures traders know demand for gas rises in the summer as families go on vacation. They start buying oil futures contracts in the spring in anticipation of that price rise.
Commodities traders also cause high gas prices. They buy oil and gasoline at the commodities futures markets. Those markets allow companies to buy contracts of gasoline for future delivery at an agreed-upon price. But most traders have no intention of taking ownership of the gasoline. Instead, they plan to sell the contract for a profit.
Since 2008, both gas and oil prices are affected more by the ups and downs in these futures contracts. The price depends on what buyers think the price of gas or oil will be in the future. When traders think gas or oil prices will be high, they bid them up even higher. In this way, commodities traders create a self-fulfilling prophecy. This leads to an asset bubble. Unfortunately, the one who pays for this bubble is you.
Gas and oil prices also rise when the value of the dollar declines. That's because oil contracts are all denominated in dollars. That's why oil prices rose between 2002 and 2014. The dollar lost 40 percent of its value during that time. Oil prices fell in 2015 and 2016. That's because a strong dollar allowed OPEC members to make more money while keeping supply constant.
The Energy Information Administration forecasts that oil prices will remain in the same range through March 2018. That means gas prices won't go much higher. But some commodities traders think the price could go as high as $68 a barrel. That's unlikely. Shale oil producers will start coming back online at current prices.
When Else Prices Have Been High
In August, 2017, average gas prices rose from $2.35 a gallon to $2.49 a gallon. Hurricane Harvey wiped out 5 percent of the nation's oil and gas production. The Department of Energy released 500,000 barrels of oil from the Strategic Petroleum Reserve. By September 5, gas prices had returned to normal.
On November 30, 2016, gas prices rose when OPEC cut production. Members agreed to reduce supply by 1.2 million barrels per day in January 2017. In response, traders bid oil prices to $51 a barrel in December 2016. That's double the 13-year low of $26.55/b in January 2016. Gas prices rose for 14 consecutive days after the meeting. The national average of $2.21 per gallon was up 20 cents compared to the same date last year.
In August 2015, gas prices rose from an average of $2.58 a gallon to $2.62 a gallon. This spike was due to an outage at BP's Whiting refinery in Indiana, making prices in the Midwest higher than average.
In California, the price at the pump increased to almost $4 a gallon in July 2015. Midwest refinery problems sent California's oil elsewhere. Since it doesn't have major pipelines from other regions, California had to wait for tankers with imported oil to arrive. A similar thing happened in 2012. It was just a temporary regional problem.
Prices rose in April 2014 because the price for domestic oil rose to $101 a barrel. The domestic oil price is benchmarked by the reference grade, West Texas Intermediate. Oil prices rose because new pipelines from the Cushing, Oklahoma storage hub lowered inventories to the lowest level since November 2009. In addition, the price of imported oil, a grade called the North Sea Brent, rose to $110 per barrel. This was caused by political unrest in Ukraine, Nigeria, and Iraq. The Energy Information Administration expected average national prices to remain at $3.60 a gallon until May.
In early 2013, Iran started war games near the Strait of Hormuz. Almost 20 percent of the world's oil flows through this narrow checkpoint bordering Iran and Oman. If Iran threatened to close the Strait, it would have raised the fear of a dramatic decline in oil supply. In anticipation of such a crisis, oil traders bid up the price, which reached $118.90/barrel on February 8. Gas prices soon followed, rising to $3.85 by February 25. They rose again in August 2013 because oil prices hit a 15-month high that summer.
That spike was created by political unrest in Egypt.
In September 2012, prices rose to an average high of $4.50 a gallon in California. That was because of supply shortage from two causes. The first was a power outage at the Exxon refinery in Torrance, CA. The power failure was caused by a heat wave. The second was a shutdown of a major north-south oil pipeline. These came on top of East Coast refinery shutdowns due to regular seasonal maintenance.
In August, prices were high as a result of Hurricane Isaac, which hit the U.S. Gulf Coast region on August 28, 2012. In anticipation of the Category I hurricane, refineries in the area shut down production. As a result, crude oil production lost 1.3 million barrels per day. This caused the average national price of gas to jump in one day, from $0.05 to $3.80 on Wednesday. Prices in Ohio, Indiana, and Illinois rose even further, as the storm closed a pipeline that feeds the Midwest.
In February 2012, concerns about a potential military action, by either Israel or even the United States, against Iran caused high oil prices. Second, some U.S. oil refineries were closing, according to an Environmental Impact Assessment report. Third, oil and gas prices tend to rise every spring, in anticipation of increased demand during the summer driving vacation season.
As a result, the prices for a gallon of gasoline hit the benchmark $3.50 by February 15, two weeks earlier than in 2011. By mid-March, the national average had jumped to $3.87 a gallon. That's because, two weeks earlier as well, the price of oil reached its benchmark of $100 a barrel. Oil went on to hit $109.77 by the end of February, before dropping slightly to $107.40 in mid-March.
In April 2011, fears about unrest in Libya and Egypt sent oil prices up to $113 a barrel. In May 2011, as oil prices dropped, the price at the pump stayed high. Why? Commodities traders were concerned about refinery closures due to the Mississippi River floods.
Although demand and supply were fairly constant, gas prices in 2008 rose to $4.17 a gallon as oil prices skyrocketed to $143.68 a barrel. During the 2008 financial crisis, commodities traders drove up the price of oil, even though supply increased and demand fell. The EIA cited an increased flow of investment money into commodities markets. In other words, money that used to be invested in real estate or the global stock market was instead being invested in oil futures.
In the summer of 2009, the price at the pump rose again, despite the recession, which decreased demand. Commodities traders were the reason for both. Prices also rise during the summer vacation season, as driving increases. Gas and oil prices also increase whenever there is concern about surging demand from China and India or a curtailment of oil supply.
What Makes High Prices Drop
The summertime vacation-driving season increases gas prices by an average of 10 cents per gallon. Despite the increased use of ethanol, prices still increase. Prices fall in the winter, since transportation needs are lower. This even offsets an increase in oil usage for winter heating in the northeastern United States.
What We Can Do About It
The most immediate thing we can do is reduce our usage of gas, either through driving less or increasing fuel efficiency. Surprisingly, the best way to increase fuel efficiency is to keep tires inflated.
Longer term, we can change our need for oil and gas by switching to alternative fuel vehicles. Urban dwellers can use public transit. Others can move closer to work to reduce commuting time.
Could this reduction in itself reduce the high price of gas? It could, if it were on a sustained basis over a long period of time. That's because gasoline accounts for only 20 percent of each barrel of oil. Oil companies would still profit from the non-gasoline parts of their business. But even if consumers could conceivably stop 100 percent of gasoline use, oil prices might only decline 20 percent.
Why a Gas Boycott Wouldn't Work
Could a gasoline boycott halt rising prices, even if oil prices stayed high? Probably not by much. That's because the other elements that go into the price of gas would take a long time to change. Taxes, which comprise 13 percent of gas prices, would require Congressional approval. Refinery costs, which comprise 8 percent, and distribution costs, at 7 percent, are fixed and difficult to reduce.
A boycott of one brand of gas could actually increase prices since there would be fewer gas outlets. Those companies that were boycotted would simply sell their gas to those that weren't boycotted, defeating the purpose.
A boycott of all gas companies would lower prices by 20 percent. Oil companies might raise prices on jet fuel, heating oil, and other industrial uses to make up the loss. A boycott would not affect other pressures on the price of oil. These include the dollar's decline and commodities traders.
The only real way to lower gas prices is to lower demand for gas and oil over a long period of time. This would work, since the United States consumes 25 percent of the world's oil. This has increased over the last 20 years, from 15 million barrels per day to 19.6 million bpd. A concerted effort might convince commodities traders that oil is a bad investment. This would allow oil prices to return to pre-bubble levels.