Food for thought and thought for food...
Repost from an article from AAA Arizona a few years ago - the information is still educational...
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What makes gas prices go up?
Supply and demand.
Supply. The supply of both oil and gasoline can not be increased very much. Most oil producers are pumping near capacity. (For example, OPEC is within about 10% of capacity right now.) Gasoline refineries are also near capacity and there are no new refineries being built.
Demand. The demand for oil is soaring worldwide. China, for example, is using oil at almost twice the rate economists expected. There is a lot of competition for oil right now, and that drives the price up. The consumption of gasoline is up 4% from spring 2003 due to a booming economy, a burgeoning population, more driving, and the popularity of gas guzzling SUV's and trucks in the U.S. 45% of the oil we use in the United States goes for motor fuel.
Speculation in the futures markets.
Oil and gasoline are commodities that are traded on the futures markets. Whenever anything happens to make traders think the price will go up (or down) they react accordingly. This means oil and gasoline price are not always directly related to consumer demand or to the cost of producing gasoline. An act of violence in the Mid-east, a refinery accident clear across the country, or even an unsubstantiated rumor, can change wholesale prices and force retailers to raise prices at the pump.
Why are prices different in different areas?
Proximity to refineries and supply.
It seems that prices should be cheapest near ports and refineries because transportation is less expensive and supplies are plentiful, but it doesn't always work that way. Environmental, regulatory, and contractual issues can often have a greater bearing on prices than production and transportation. For example, California, which has plenty of ports and plenty of crude oil, has the most expensive gasoline in the country, due largely to its stringent clean air requirements.
Environmental Regulations
There are over 20 different blends of gasoline in various parts of the country, all intended to help clean the air. All these blends cost more to refine than plain old unleaded gas. Some are more expensive than others, so prices vary depending on the formulation.
Competition
Competition takes place on many levels in the petroleum industry -- crude oil production and sale, shipping, refining, transport of finished gas, and of course, your local gas station retailer. Generally, prices are a little better in areas with many major oil companies competing for your business...just like all other industries.
Contracts and Competition
Service stations usually maintain some kind of contractual relationship with a major gasoline supplier. This can make it difficult for some stations to compete on price because they are tied to a contract. For example, suppose Station A buys gas at a lower spot (wholesale) price today, so lowers its retail gasoline price. Station B might wish he could drop his prices, but can't afford to because he is locked into a contract to buy gasoline at a higher wholesale price. Until that wholesale contract ends, Station B can't afford to lower its retail price.
Speculation in gasoline futures
Since some gasoline is traded on futures markets, speculators can affect prices. It's a little like the crude oil futures market, or the stock market. Sometimes price changes are driven by events as far away as the Middle East, by rumors, or by perceived supply disruptions.
Taxes
Yes, they matter. Taxes in the United States average about $0.42 per gallon and typically make up 15-20% of the cost of a gallon of gas. In most states taxes are about evenly split between state and federal taxes. Taxes account for the difference between the relatively low gasoline prices in the U.S. and high prices in Europe and many other countries, where gasoline can cost over $4.00 per gallon. The average French or Italian family, who drive small cars fewer miles each year than their American counterparts, may pay the equivalent of $2,000 per year in gasoline taxes.
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Gasoline Refineries: Capacity and Margins
Over the past three decades, almost half the 300 refineries in the U.S. have been closed. These closures were primarily due to business decisions by the oil industry or to government-mandated closures or sales due to mergers (of course, the mergers themselves are business decisions).
Although refineries are much more efficient than they used to be, over the past 15 years or so, there has been a net loss in refining capacity of about a million barrels per day. Some argue that the industry is deliberately squeezing supply in order to raise the price of gas. While this might seem unfair, it is not illegal unless the refining companies are colluding (working together) to set prices or shut out competitors. A number of national legislators and attorneys general have investigated and, to this date, found no evidence of illegal activity.
Perspective on refinery margins:
Right now, refiners' margins (the amount refiners add to the price of gasoline) are below what they've averaged for the last three years. They've been fairly high this year, but, in fairness we must point out that margins are below average more than they are above. The refining business is very volatile with short periods of extremely high margins, then longer periods of average or below average margins. This price volatility is very upsetting to the public, so, if refiners are manipulating the market, you'd think they'd find a more subtle way of doing it!
=============================
What makes gas prices go up?
Supply and demand.
Supply. The supply of both oil and gasoline can not be increased very much. Most oil producers are pumping near capacity. (For example, OPEC is within about 10% of capacity right now.) Gasoline refineries are also near capacity and there are no new refineries being built.
Demand. The demand for oil is soaring worldwide. China, for example, is using oil at almost twice the rate economists expected. There is a lot of competition for oil right now, and that drives the price up. The consumption of gasoline is up 4% from spring 2003 due to a booming economy, a burgeoning population, more driving, and the popularity of gas guzzling SUV's and trucks in the U.S. 45% of the oil we use in the United States goes for motor fuel.
Speculation in the futures markets.
Oil and gasoline are commodities that are traded on the futures markets. Whenever anything happens to make traders think the price will go up (or down) they react accordingly. This means oil and gasoline price are not always directly related to consumer demand or to the cost of producing gasoline. An act of violence in the Mid-east, a refinery accident clear across the country, or even an unsubstantiated rumor, can change wholesale prices and force retailers to raise prices at the pump.
Why are prices different in different areas?
Proximity to refineries and supply.
It seems that prices should be cheapest near ports and refineries because transportation is less expensive and supplies are plentiful, but it doesn't always work that way. Environmental, regulatory, and contractual issues can often have a greater bearing on prices than production and transportation. For example, California, which has plenty of ports and plenty of crude oil, has the most expensive gasoline in the country, due largely to its stringent clean air requirements.
Environmental Regulations
There are over 20 different blends of gasoline in various parts of the country, all intended to help clean the air. All these blends cost more to refine than plain old unleaded gas. Some are more expensive than others, so prices vary depending on the formulation.
Competition
Competition takes place on many levels in the petroleum industry -- crude oil production and sale, shipping, refining, transport of finished gas, and of course, your local gas station retailer. Generally, prices are a little better in areas with many major oil companies competing for your business...just like all other industries.
Contracts and Competition
Service stations usually maintain some kind of contractual relationship with a major gasoline supplier. This can make it difficult for some stations to compete on price because they are tied to a contract. For example, suppose Station A buys gas at a lower spot (wholesale) price today, so lowers its retail gasoline price. Station B might wish he could drop his prices, but can't afford to because he is locked into a contract to buy gasoline at a higher wholesale price. Until that wholesale contract ends, Station B can't afford to lower its retail price.
Speculation in gasoline futures
Since some gasoline is traded on futures markets, speculators can affect prices. It's a little like the crude oil futures market, or the stock market. Sometimes price changes are driven by events as far away as the Middle East, by rumors, or by perceived supply disruptions.
Taxes
Yes, they matter. Taxes in the United States average about $0.42 per gallon and typically make up 15-20% of the cost of a gallon of gas. In most states taxes are about evenly split between state and federal taxes. Taxes account for the difference between the relatively low gasoline prices in the U.S. and high prices in Europe and many other countries, where gasoline can cost over $4.00 per gallon. The average French or Italian family, who drive small cars fewer miles each year than their American counterparts, may pay the equivalent of $2,000 per year in gasoline taxes.
--------------------------------------------------------------------------------
Gasoline Refineries: Capacity and Margins
Over the past three decades, almost half the 300 refineries in the U.S. have been closed. These closures were primarily due to business decisions by the oil industry or to government-mandated closures or sales due to mergers (of course, the mergers themselves are business decisions).
Although refineries are much more efficient than they used to be, over the past 15 years or so, there has been a net loss in refining capacity of about a million barrels per day. Some argue that the industry is deliberately squeezing supply in order to raise the price of gas. While this might seem unfair, it is not illegal unless the refining companies are colluding (working together) to set prices or shut out competitors. A number of national legislators and attorneys general have investigated and, to this date, found no evidence of illegal activity.
Perspective on refinery margins:
Right now, refiners' margins (the amount refiners add to the price of gasoline) are below what they've averaged for the last three years. They've been fairly high this year, but, in fairness we must point out that margins are below average more than they are above. The refining business is very volatile with short periods of extremely high margins, then longer periods of average or below average margins. This price volatility is very upsetting to the public, so, if refiners are manipulating the market, you'd think they'd find a more subtle way of doing it!