Why Are Gas Prices High

As I was sitting in my car at the gas station filling up, I couldn’t help but think, Why are gas prices so high? It seems like they just keep going up and up with no end in sight. Maybe you’ve wondered the same thing before pumping your gas, or perhaps you have an opinion on the matter based on what you read in the news or hear from other people. Here are four reasons why gas prices are so high. But first, it’s important to understand what factors go into determining how much we pay for gasoline every time we fill up our tanks...

How gas prices are calculated

Before we explore why gas prices are high, it is important to understand how they are calculated. One of the simplest ways to explain this is through supply and demand. Demand is directly related to gas prices, so if people want a lot of gas then the price will go up. Demand comes from two places: personal use and industrial use.

 Personal use demand is calculated by multiplying how much gas an individual uses per year by how much they are willing to pay for that gas.

The problem with simply saying when supply and demand are equal, price = cost + profit is that all prices are subject to markups, markdowns, and taxes. Take a simple case of a store selling its goods at MSRP. If you see something on sale at 60% off then you know it was marked down from 100% off.

What drives gas prices

Oil is the main product that contributes to the price of gas. The global oil market and supply and demand in individual countries influence the price of gas, and significant factors within these external factors contribute to changing prices at any given time. Sometimes, there are international sanctions, embargoes or boycotts put in place by groups like OPEC (Organization of Petroleum Exporting Countries) that restrict or limit production; when this happens, prices will tend to go up as less oil is available.

 There are also market and speculative pressures, where oil prices move as a result of investor expectations. This may happen if an analyst forecasts that demand for a particular type of oil is going to increase, leading to an increase in price, or if there’s uncertainty about supply (for example, after an environmental disaster) leading to higher prices in anticipation of increased demand.

 Although oil prices generally move together, they don’t always move in lockstep. If something unique happens to one of these factors or even if there’s a general perception that it has, you might see a divergence in prices between different types of oil.

Understanding the history of gas prices in the US

The United States has had an active energy policy since the 1920s, which consists of setting production quotas and raising taxes on imported oil. In 1973, when OPEC put an embargo on the US due to our support of Israel during the Yom Kippur War, gas prices increased from approximately 30 cents per gallon to almost 60 cents per gallon in 1975. The next significant increase was in 1979 when the Iranian Revolution disrupted a fifth of world production.

 As of 2018, OPEC is back at it again and may be trying to get gas prices up by increasing production quotas. The cartel’s members include major oil producers like Saudi Arabia, Iraq, and Iran.

 From there, demand has steadily increased due to increasing oil consumption. The development of hydraulic fracturing, or fracking, combined with horizontal drilling technology also boosted production. This resulted in more than 3 million barrels of oil produced per day in 2016, up from around 1 million in 2008 and approximately 5 percent of total world production compared to 2 percent prior to 2008.

Comparing US, European and Asian gas prices

In recent years, the price of gasoline in the United States has fluctuated dramatically. What was once a stable 2-3 dollars per gallon is now at a high 4-6 dollars per gallon. In addition to the new cost of gas, it is also more expensive to buy and maintain a car than it was just ten years ago. But why are gas prices so high?

 The short answer is that gas prices in America are too high because of market manipulation and increased taxes. To get a more thorough understanding, we need to understand how gas prices are set and taxed, which vary widely by country.

 The price of gasoline is set by supply and demand. When there are higher gas prices, consumers buy less gas because they have other transportation options. There are a variety of factors that affect supply and demand, including supply-side constraints such as oil and refinery capacity. On top of these factors, though, there is also something called market manipulation by large gas retailers like Shell Oil Company and British Petroleum (BP).

Summary

Gas prices are always fluctuating, so it's not easy to figure out the true cause of a price spike. But generally speaking, the price of crude oil determines what type of gas you'll buy at the pump. Higher crude oil prices usually mean a higher price for gas as well. However, when natural disasters like Hurricane Harvey disrupt refinery production and create shortages in key areas like Houston or Los Angeles, gas prices rise.