The Gas is Too Damn High — Here's Why

The average price for a gallon of gas in the U.S. is $3.68. Ouch! But why is this the case?

Oil prices are a function of supply and demand set on a world market with many different factors that influence it. Speculation on the future price of crude oil affects demand (see crude oil futures market). Foreign conflict in the Middle East affects supply. Government policies and regulations affect supply, and overall consumer demand is influenced by economic conditions and has natural seasonal peaks (such as the July 4).

So which of these factors is influencing the current rise in prices right now? The answer is all of them. Unrest in the Middle East is one factor, specifically the coup in Egypt, unrest in Libya, and ongoing civil war in Syria. Protesters in Libya shutting down oil terminals has disrupted a major source of oil to Europe, driving up prices there. Egypt is not a big oil exporting country, but it is significant in that the Suez Canal falls within its borders. If internal conflict resulted in some disruption to the flow of cargo through that vital trading route, it would be catastrophic for global oil prices. Though as chaotic as things are in Egypt right now, the chances of that affecting Suez traffic is very minimal, and does not affect speculation enough to justify the increase in the amount you’re paying at the pump.

The blend of gas you pump into your car in the summer is different from the blend you're pumping in the winter, due to EPA regulations on the Reid Vapor Pressure (RVP) of the blend. RVP is a measure of gasoline volatility, and while winter blends generally have an RVP of 11 to 15, summer blends have to be below 9. In other words, the summer blend emits fewer pollutants than the winter blend. The transition in production between summer and winter blends affects production, which causes gas prices to rise, and this is why we generally see a seasonal bump in gas prices starting in the spring. The Great Lakes region of the country is hit the hardest by this, as there are fewer gas refineries that serve that region of the country than other regions. In fact, oil refinery woes in the Midwest have been responsible for a recent jump in gas prices in the region. And Hawai'i, of course, which usually has the highest gas prices in the country.

A strengthening U.S. economy, including a surging stock market and a busy summer driving season, account for an increase in demand which results in the seasonal increase in gas prices as well. When we long for the good old days when we were paying less than two dollars a gallon for gas just several years ago, it is important to note that our economy was also in recession and was hemorrhaging hundreds of thousands of jobs per month — something no one wants. 

So what's the solution to this? In the short-term, there isn't one. We'll just have to grind it out. The good news is a peak is in sight and gas prices will soon plateau and gradually fall back to earth.

Over the long run, Americans have been getting more per-capita economic activity out of a barrel of crude oil than we have in the past, largely thanks to increased fuel efficiency standards, which are only set to improve in the years to come. The bad news is we aren't doing it fast enough to keep up with global demand. Even so, increased fuel-efficiency standards are an integral part of the equation we need to solve our energy crisis.

A popular solution proposed is increased domestic oil production ("Drill, baby, drill!"). The reality is we have seen a boom in domestic oil drilling, and that hasn't done much to curtail rising oil prices. Dean Baker pointed this out in an op-ed on gas prices last year. U.S. oil production is roughly eight million barrels a day, accounting for less than 9% of the worldwide market of over 90 million barrels per day. Even if U.S. oil production could be increased by one-third (a nearly impossible feat), it would only increase world supply by 3%, which would lower the price of oil by 7-8%. That marginal decrease in price would come nowhere close to resulting in $4 a gallon gas dropping to $2 a gallon. So in other words, there is nothing the U.S. can do in terms of its domestic production that would bring the price at the pump down to a level where American car owners are happy.

An alternative energy revolution is long overdue in our country.