Soaring gas prices

[[NOTE TO THE READER]: Unfortunately I wasn’t able to spend the time on this project that I would have liked, so needless to say it is just a rough beginning. Why have gas prices increased so much? Because political, economical, and social factors combined to create the perfect storm. The value of the dollar is decreasing (so we can’t get as much crude oil for the same amount of money), world conflicts (Iran, unrest in Israel, Nigeria, Turkey), a pipeline disruption in the North Sea, peak oil (look it up), increased demand (China and India), decreased supply (OPEC nations using more petrol themselves), Wall Street bidding up prices, a Texas refinery fire, and on, and on, and on. Basically it looks like our days of .99 cent/gallon gas are over and done. Enjoy filling up for under $100 while you can!]

Soaring gas prices- A summary

Most consumers in today’s marketplace are floored by the rapidly rising prices of many consumer products, especially gasoline. Many Americans cringe while filling up their tanks with gas, hoping to at least stay under $100 for a full tank. Many people are considering other transportation options, changing travel plans, and just staying home to conserve this precious resource.

This brief seeks to find answers to some of the common questions asked by American gasoline consumers today: What is gasoline? Why are gasoline prices so high? Who sets the price of gasoline? What is OPEC? Who is making the profits? What government intervention is proposed? What are coming innovations in car design/alternative fuels to reduce our dependency on gas? What is in store for the future? Although the information presented here is just a small sample of the information and analysis available on the current fuel crisis, it should provide a base for understanding the reasons for rising fuel costs and an estimation of what is in store for the future.

[As you can see, I’ve only answered question #1, but never fear the rest is still to come.]

The Energy Information Administration

A main source for this paper is the Energy Information Administration, a division of the US Department of Energy. The Energy Information Administration (EIA) was created by Congress in 1977 and is a statistical agency of the U.S. Department of Energy. Their mission is to provide “policy-neutral data, forecasts, and analyses to promote sound policy making, efficient markets, and public understanding regarding energy and its interaction with the economy and the environment.” (EIA, 2008).

In their estimate, the EIA states that gasoline prices are so high because of the record high cost of crude oil. Their website states that the “cost of crude oil now accounts for about 73% of the gasoline pump price. World crude oil prices are at record highs due mainly to high worldwide oil demand relative to supply…political events, and conflicts in some major oil producing regions” (EIA, 2008).


In addition, they note that gasoline prices typically increase during spring and summer months due to “seasonal demand and the additional cost of producing summer-grade “reformulated” gasoline required to meet air quality standards in many urban areas” (EIA, 2008).

What is Gasoline?

In order to better understand how gasoline prices are calculated, it is helpful to know what gasoline is made of and where it comes from. Merriam-Webster defines gasoline as “a flammable liquid mixture made from petroleum and used especially as a motor fuel” (The Merriam-Webster Dictionary [1997], 314). “Gasoline” is the common name for petroleum fuel used in North America, while in other countries “gas” is called most commonly called “petrol” (Wikipedia, 2008).

In a pamphlet entitled “Where does my gasoline come from?” the EIA explains that in the United States,
…most gasoline is made from crude oil, which was formed from the remains of plants and animals that lived hundreds of millions of years ago. These remains were covered with layers of sediment over time. With extreme pressure and high temperatures over millions of years, these remains became the mix of liquid hydrocarbons (an organic chemical compound of hydrogen and carbon) that we call crude oil. Refineries break down these hydrocarbons into different products. These “refined products” include gasoline, diesel fuel, heating oil, jet fuel, liquefied petroleum gases, residual fuel oil, and many other products. (Energy Information Administration 2008, 1).

The pamphlet states that in 2007 although the United States refineries produced “90 percent of the gasoline used in the United States,” less than “35 percent of the crude oil used by U.S. refineries was produced in the United States” indicating our dependence on foreign countries for oil imports. The majority of U.S. imports (48 percent) come from countries in the western hemisphere, 18 percent from Persian Gulf countries, 22 percent from African countries, and 12 percent from other regions (Energy Information Administration 2008, 1).

From crude oil to your local gas station pumps

After crude oil is imported and refined into gasoline, it is first shipped by pipeline to storage terminals in consumer areas where it is then loaded into trucks for delivery to gas stations (Energy Information Administration 2008, 2). The gasoline is sent through the pipelines in batches and the products of one refinery often mix with the products of another. At the terminals the gasoline is loaded into tanker trucks, which have several compartments for transporting different grades of gasoline. The pamphlet states that the “truck tank is where the special additive packages of gasoline retailers get blended into the gasoline to differentiate one blend from another,” and that these additives are often “splash blended” or mixed en route to the filling station (Energy Information Administration 2008, 2).

The EIA notes “the fact that you purchase gasoline from a given company does not necessarily mean that the gasoline was actually produced by that particular company’s refineries” because gasoline from several different refineries is often combined for shipment through pipeline (Energy Information Administration 2008, 3). Interestingly, the “only difference between the gasoline at station X versus the gasoline at station Y may be the small amount of additives that those companies add to the gasoline before it gets to the pump (Energy Information Administration 2008, 3).

Gasoline is a regional product however, with different emissions requirements and environmental programs regulating the type of gasoline that can be sold in an area. The EIA notes that “these distinct and area specific gasoline requirements mean that gasoline is not a homogenous product nationwide” and that “gasoline produced for sale in one area may not be suitable for use in another area that has a supply shortage” (Energy Information Administration 2008, 3). The difference in your state or local emissions requirements is a factor that accounts for your local gas price.


REFERENCE LIST

Energy Information Administration. 2008. “About Us,” EIA online. Available from http://www.eia.doe.gov/neic/aboutEIA/aboutus.html; Internet. Accessed July 31, 2008.

Energy Information Administration. 2008. Where does my gasoline come from? April 2008. Available from http://www.eia.doe.gov/bookshelf/brochures/gasoline/printer_
friendly.pdf. Accessed July 31, 2008.

The Merriam-Webster Dictionary [1997]. Springfield, MA: Merriam-Webster Incorporated.

Wikipedia. 2008. “Gasoline,” Wikipedia online. Available from http://en.wikipedia.org/
wiki/Petrol; Internet. Accessed July 31, 2008.