This is an excellent tutorial on how the gas our cars use gets from the ground to the pump and how it’s all priced along the way. At least you’ll know the right places to put your anger while unloading your wallet at the pump.
Why Is Gas So Freakin’ Expensive?
Did you know that gas price gouging almost never occurs as prices rise? Rather, it’s most often when dealers keep prices artificially high even as their costs fall.
As gas costs rise to $4 a gallon and oil companies earn around $100 billion each year, it’s a good time to question what really goes into the price of gas.
The numbers on the gas station sign hide a complex set of transactions. Before gas can power your car, it must be discovered as crude oil, traverse three markets, and be refined from crude into gas.
Inside, we’ll explain the three markets, walk you through the role of refineries, and show how oil companies use creative tactics to manipulate gas prices…
Best most informative article I have seen you post so far
Excellent read
now if we can figure out a way to kill all the traders and speculators we might have affordable gas again
Isn’t the problem that gas is still too cheap?
Less consumption of gasoline (through higher prices or taxes) would encourage more fuel-efficient cars; lower CO2 emissions; and ultimately, reduce the price of oil.
Reducing oil revenues is the single most effective thing we can do to combat terrorism.
Europeans consume about 8 barrels of oil per year per capita. Americans consume 24 barrels.
Anyone know how to turn a 4.7 Dodge V8 into a hybrid? 🙁
Here’s a report on why the price spikes crazily in markets where SuperAmerica has a large presence: http://shrinkster.com/phq
#2 – artificially raising the price of gas to discourage consumption has the side effect of raising the price on everything else too. Damaging the economy to reduce fuel use isn’t the way to go.
Is gas still cheaper than bottled water?
Gas prices are not high enough. Place a quarter + tax a year, for the next four years, while at the same time lowering income tax by an equal measure and I’ll say that the prices are fine. Do it for the environment, do it for Arthur C. Pigou.
#6 – so you’re going to counteract the impact at the individual level – what about the increase of transportation of goods costs that get passed on to all of us through price increases on everything else?
Even ignoring the issue of social engineering by the Gov’t, artificially jacking the price is not the right way to go.
I agree with TheGlobalWarmer :-O on #6 #7.
Reminds me of Walmart – make your money all the way from the manufacturing to distribution – but not – or very little – at retail.
There’s very little to do, as an individual. The elected officials also have no power. They can’t tax less because of debt, revenue is required elsewhere.
Urban sprawl is the real problem with the lengthy commute and inadequate public transportation. Fix that, and you fix smog pollution and part of global warming.
#7 – The goal is to lower taxes that are already in place with aims to offset the gas tax, or even a broader carbon tax, hike. While it is true that the CPI would rise along with the direct gasoline price, but say the C.P.I rises +3% above its average or expected value over this four year time period. You would want to lower other taxes by the expected nominal CPI hike + the additional 3% . Also, this would give consumers more incentives to consume less energy abundant goods, such as switching to hybrids, driving less walking more, turning off lights, buying better water heaters, blah blah blah. Plus, if producers perceive this consumer preference change to be constant, they would increase production of these efficient goods, lowering the market cost even more.
This type of plan can either be a zero-sum game, or I’d expect it to yield a consumer/producer surplus.
Here’s a good article on the carbon tax (http://tinyurl.com/38s28h)
Also Greg Mankiw (@ http://gregmankiw.blogspot.com/) who started a Piguo club for these types of measures.
I think the thing that agitates most Americans is not the price, but the variability of the price. It’s 2.79 today, then 2.89 tomorrow, then 2.99 the next. Eventually the price drops, but by two or three cents at a time, not the ten cent spikes that you see on the way up. It’s the spike that upsets us the most; the fact that had we filled yesterday rather than today, we’d have saved a buck or two. If we want to see Americans more calm about gas prices, we need to normalize the price, even if it is on an upward curve.
Gas prices are so high because oil companies want to make larger and larger profits each year. First, the CEOs need to increase the Bottom Line to ensure their obscene bonuses and second, shareholders want bigger dividends.
If any of the ‘the spin’ was true, profits would stay the same or even fall when there were problems and shortages – not rise. It’s a case of arguing black is white so long and so often in so many places, we just sort of phase out when considering what’s really happening.
Someone smarter than me explain this, please:
The people buying and selling futures rarely, if ever, collect on their contracts; a seven year period saw 5 billion barrels traded, of which only 31,000 were ever delivered.
Thanks 🙂
#4
The economy is a dynamic system not a static one so while the price of some goods might rise initially, the economy would adjust as people find creative ways to reduce the energy component of their goods, and so on and so forth.
Do we really need 4000 + sq. ft. MacMansions? These are a product of relatively cheap energy.
I understand why some of you say that prices are not high enough. It’s an easy enough claim to make as long as we maintain the American tradition of ignoring the needs of the working poor.
“Is gas still cheaper than bottled water?”
And safer to drink!
#9 – once again ignoring the evil of social engineering: Our tax code is incredibly overblown and messed up as it is. What happens when you start playing even more games with it? Also, You’re spinning a US of Utopia scenario. As Mark mentioned in #8 – the tax reduction part of the equation ain’t so simple. If nothing else, reducing a tax means someone’s pork barrel project gets reduced. Can’t have that here in the real world.
Urban sprawl may or may not be a “problem” but it’s not going away nor should it. It occurred in the first place because a LOT of Americans want to live that way. We don’t want to live in cities nor near where we work. Public transportation can only work in densely packed areas. Europe is small and packed together. (Ex. Germany has a population of 80M but only the area of Wisconsin, pop 5.5M). A Eurostyle transit system will not work here.
#14 – Excellent point. Raise fuel and CPI and you end up pushing more people into the group too.
#13 – Either the CPI goes up or everyone starts cuts back. In either case the end result is a lower standard of living. We all get harmed either way.
Energy is and should be cheap. It’s the other market forces being discussed here that cause the problem.
Apologies for any “hatred” in my post but quite frankly you Americans are off your flipping heads.
You think 53p GBP per litre is a lot, gosh, try doubling that and thats AVERAGE price in the UK.You must feel so shafted by big oil.
O and if you vote for another complete idiot in your presidential election who doesnt want to sign a CO2 emissions treaty because a multi-billion air wont invite him to his Christmas party anymore, your gonna find yourself on the business end of a 2×4 as you like to say.
Thanks
#18 – Your prices are so high because of exactly the type of social engineering taxes I’m arguing against.
18. Yeah, we may be flippin crazy but your government screws you guys even more than ours does. And that is a lot, my butt is sore.
#20 – I’ve worked in several companies with European offices and on many occassion met and socialized with my European counterparts.
They have better access to health care and education than I do. They have far more personal time, vacation time, fewer hours to work each week, and more relaxing lives than I do. They enjoy better health do to having less stress. I can really stand to be “screwed” like that just a little more over here where we worship the dollar, then the dollar, and the dollar, and nothing else.
#18 – You aren’t wrong… but many Europeans don’t have a heathy understanding of how big we are. As my politically challenged but strangely right friend, the Global Warmer, points out, the whole of Germany is about the size of Wisconsin. We got 49 more states to with that one, and massive tracts of sparse nothingness (what some call countryside, quaintly enough) between our beautiful meccas of culture (aka: cities).
Public transit doesn’t fail here because its impractical, but because it isn’t fashionable. We are such junkies for the illusion of being independent that we can’t ever go anywhere without driving. I’d love to grab a high speed rail ride from where I am to where I wanna be.
I drive from Indianapolis to Chicago, only to have to pay and park in a city where I have no need of a car. Why should I even bring the car?
In #21 sadly over-urbanized fried has pointed out the one area public transit can work, like I said, densely packed areas. Unfortunaltely to get to real 😉 destinations (Tofte, MN, TenSleep, WY, Hot Springs, SD, etc.) whenever you feel like it, you’d need to have more public transit vehicles on stand-by than there are currently cars.
OFTLO, I just heard a story from a person talking to friends in London who mentioned that they were planning to hop a flight to NYC, rent a car and take a couple of days to drive to California, doing a little sight seeing along the way thus illustrating how Euros just don’t get the sheer scale of this grand nation.
I work in an industry that heavily shipping dependant and I have to say that taxing gas $.25 would raise the cost of goods far more than 3 or 4%. Last year alone we saw 20% increase in product costs in the roofing industry due to increasing shipping costs not to mention additional cost increases do to decreasing amounts and increasing costs of waste crude to make roofing out of.
Adding $.25 tax to gas is like increasing minimum wage it’s futile and has little or no overall affect on the employees overall expendable income.
2,
NO..
If you look at the past.
You will discover that the Car makers WONT/DIDNT do anything until the Gov mandated/FORCED them to do it.
Back in the 70’s there was a promise made to find Better and Fuel efficent/Alternative cars..
Its taken 15+ years for them to install a 5 speed automatic transmission, in an Aluminum car thats 1000 lbs LIGHTER, then the OLD cars.
fortold:
Aluminum is lighter and can make better cars.
Smaller cars do better.
Aluminum had to be reinforced for safty reasons. It didnt lower the weight by much After.
I have an OLD car that still gets 30mpg after 20 years.
#21, 22, 23 – Read this article by Greg Mankiw for an explanation of why he feels that a gasoline tax may be a good idea (http://tinyurl.com/24z3un). He also is a guest on Econtalk (@ econtalk.org) where he reiterates his case.
If you feel that the consumption of gasoline produces zero negative externalities, than you won’t be persuaded, otherwise it is worth checking out as an alternative to cumbersome government regulation.
#23 – No a pigouvian tax is not like minimum wage.
“A Pigovian tax (also spelled Pigouvian tax) is a tax levied to correct the negative externalities of a market activity. ”
http://en.wikipedia.org/wiki/Pigovian_tax
Placing a price floor on labour is not the same as taxing an additional unit of labour hired. Also, there are no negative externalities to hiring a unit of labour at a market clearing price.
#22 – In #21 sadly over-urbanized fried
I resent being called a “fried”
has pointed out the one area public transit can work, like I said, densely packed areas. Unfortunaltely to get to real 😉 destinations (Tofte, MN, TenSleep, WY, Hot Springs, SD, etc.) whenever you feel like it, you’d need to have more public transit vehicles on stand-by than there are currently cars.
The car is still the best way to get from Pig’s Breath, Kentucky to Lizard Piss, Arizona. No doubt about it. And, road trips are fun. But New York to Chicago or San Fran to Seattle should be easier and should be done by high speed rail. The problem is that too many American suffer from the delusion that there is something anti-American about practical means of travel.
Currently, too, despite what we percieve as high gas prices, car travel for a family of four is far more economical than air or train travel. Time is the currency you save in alternate commute options. That said, as a single traveler, driving isn’t such a great bargain.
OFTLO, I just heard a story from a person talking to friends in London who mentioned that they were planning to hop a flight to NYC, rent a car and take a couple of days to drive to California, doing a little sight seeing along the way thus illustrating how Euros just don’t get the sheer scale of this grand nation.
They definately need MUCH more time, but they should travel to Chicago, rent a comfy convertable, and retrace the old Route 66 to Santa Monica. That’s a glorious history lesson and bundle of fun in one sweet package.
You and I and everyone else here knows that the scale is something to behold. Russians probably get it. The Chinese might get it. Western Europeans severely underestimate it all the time.
#25 – His second reason: “Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.
Already completely unnacceptable. What he’s describing is social engineering which is EVIL. He wants to “encourage” me to do things exactly counter to my idea of an acceptable standard of living. He’s even trying to control where I live!
The “zero-sum” solution you proposed earlier would mean, increased gas tax, lowering of other taxes in such a way that my car is not smaller, my house is not smaller nor closer to work and I have just as much or more money in my pocket at the end of that day even driving just as many or more miles than I do now. That’s not even what this yahoo is proposing. He’s proposing lower standard of living.
Example, in Minnesota, every Friday over 1 million people jump in the car, drive 2-4 hours north to the lakes (cabins and resorts) and drive back again on Sunday. This is not a bad thing this is an ESSENTIAL thing. What’s the point in having a job in the first place if not for this?
The only real solution to the fuel cost problem is more fuel. Ethanol isn’t going to cut it. If the recent breakthroughs pan out, hydrogen fuel cell might.
#26 – that was supposed to read “my over urbanized friend” – It’s hard to type when you’re driving – LOL!
“That said, as a single traveler, driving isn’t such a great bargain.” – maybe not economically, but spritually, for many of us, the long drive itself is a large part of the vacation.
Forgot, I actually agree with you about high speed rail between major hives (cities) — as long as I have the option of using it and am not forced or encouraged via taxes to use it.
#27 – Speak for yourself you survivalist kook.
I used to live in Minneapolis. The state, like most midwestern states, is a vast desolate wasteland, but the Twin Cities are very nice. I advise everyone with 3 days to spare to spend a whole summer there some time.
I live about a 1/2 a mile from where I work because I have the misfortune of working at one of those companies that builds its palace along the edge of a city bypass near the snotty Richie Rich neighborhood (that I plan to set fire to whenever the Revolution starts).
I moved here from my last place which I managed to get less than 500 feet from where I worked which meant I only had to actually drive my car once or twice every couple of weeks.
My time is far too valuable to waste in a commute. Now as soon as I nab a good gig in the Chicago Loop I’ll be able to leave this redneck state behind and eliminate my car. The last time I worked in the Loop I lived, oh so happily, without the burden of a car.
The best thing about living in a real city is that real public transit options remove the need to live so close to work. Buses are not viable options. Trains are the best way to commute.
Note to self, never ever ever accept another offer that takes you away from civilization.
I don’t hate cars. I hate commutes. Cars are fine for leisure, but I hate the lemming like grind of a commute.