Gas Prices Demystified
Why you're paying so much, and why you could soon be paying less.
Filling up at the pump has become such a pain in the pocketbook that for the first time ever, gasoline consumption in the U.S. has stopped increasing. But even though America's consumption has been virtually flat for the past five years, prices in that same period have nearly doubled, with crude oil recently hitting record highs.
While commodity prices typically decline along with demand, gas has defied these market fundamentals. But the forces behind ever-escalating prices at the pump aren't a mystery once you look at the big picture — and the good news is relief may be just down the road.
The Crude Truth
The price of crude oil accounts for up to 70 percent of what drivers ultimately pay for gas at the pump, according to the U.S. Energy Information Administration. So with crude prices recently cresting at over $110 per barrel, you don't have to be an economist to calculate why gas prices have also hit record levels.
Like any commodity, crude oil prices are governed by the laws of supply and demand, but they are also affected by market speculation. While oil industry analysts disagree on which of these two forces exerts a greater influence on oil prices, the "fundamentals" of supply and demand present an unambiguous picture of why gas prices keep on rising even though we haven't been buying as much.
On the supply side, the Organization of Petroleum Export Countries (OPEC), which controls around 40 percent of worldwide crude oil production, exerts significant influence on supply by setting strict production limits for its members.
But Bob Tippee, editor of the petroleum industry trade magazine Oil & Gas Journal, notes that OPEC has limited ability to increase supply and therefore decrease prices. "The only way OPEC could bring prices down is to increase production," he says, "but it doesn't have much room to do that. They are pretty much at practical capacity limits now. "
|Toyota Prius||48 / 45 city/hwy|
|Honda Civic Hybrid||40 / 45 city/hwy|
|Nissan Altima Hybrid||35 / 33 city/hwy|
|Ford Escape Hybrid / Mercury Mariner Hybrid / Mazda Tribute Hybrid||34 / 30 city/hwy|
|smart fortwo||33 /41 city/hwy|
|Toyota Camry Hybrid||33 / 34 city/hwy|
|Toyota Yaris||29 / 36 city/hwy|
|Toyota Corolla||28 / 37 city/hwy|
|MINI Cooper / Clubman||28 / 37 city/hwy|
|Honda Fit||28 / 34 city/hwy|
*Fuel economy data based on EPA estimates.
With an already tight oil supply, unpredictable elements such as political unrest and weather also adversely affect production and ultimately gas prices. Turmoil in the oil-rich Persian Gulf invariably pushes oil prices higher, for example, as do natural disasters such as Hurricane Katrina, which battered the epicenter of U.S. oil production along the Gulf Coast in 2005.
And while U.S. demand has leveled off, the world's oil appetite has grown substantially. "Over the last several years, global demand has increased much faster than supply," notes Douglas MacIntyre, a senior oil analyst with the Energy Information Administration.
"In 2003, total international oil consumption was 79.6 million barrels, and that jumped to 85.7 in 2007. What we've seen and expect to continue," MacIntyre adds, "is that growth in demand — particularly in China, India and the Middle East — will be much faster than in the U.S."