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Gas Prices: Don't Blame the Oil Companies…or the Government

Part 2: It's getting expensive out there.

Gas prices in the last decade have been more volatile than the previous half century. 

The extreme example was in Sept. 2007 to Dec. 2008, when prices soared 38 percent, then fell 56 percent, and then jumped 48 percent. But overall, the average gas price for the last 12 months was 78 percent higher than in 2000 (measured in 2011 dollars).

One thing that hasn't changed, however, is that the price of gas in the United States is almost entirely determined by the world price of crude oil. A simple rule of thumb is that the U.S. gas price will be about $1.20 above the price of crude. (Remember that oil is always priced per barrel, so divide that price by 42 to get the per-gallon price.) 

Do oil companies control prices? 

If they did, prices would never go down. In fact, the oil companies haven't even been able to maintain the $1.20 markup. It's been closer to $1.00 in the last few years.

Did speculators contribute to the current run-up in prices?

Probably, but the key point is that their impact is only temporary. Speculators can't use the oil, and storing it is costly. So the oil they buy will be back on the market in a few months.

Can the government do anything? 

Not much. The country (thankfully) has a market economy where prices are set by supply and demand. Releasing oil from the Strategic Petroleum Reserve (SPR) would lower prices temporarily, but the SPR is only intended for supply emergencies. Over the longer term, we could ease restrictions on drilling, but the United States has only 2 percent of the world's proven oil reserves, so even a major effort would likely boost domestic oil production by only a few million barrels per day. That would boost world output about 4 percent, which is not enough for a big price impact.

What does the future hold? 

Almost certainly more price fluctuations. Unlike most products, oil production and consumption can't change quickly or easily, so any supply disruption will cause a spike in prices because it takes a big increase to have any short-term impact. Producers and consumers eventually do respond in a big way to changes in oil prices, as we learned in the 1980s, but it takes years (perhaps a decade) to play out. 

Secondly, the overall price trend will probably be up. Oil is getting more expensive to find and consumption is still growing-not in the West but in the developing world. In particular, China's GDP now exceeds that of the US and it likely will more than double in the next 10 years.

Then again, we economists aren't very good at forecasting, so take all of this with a grain of salt. :=)

(The author is a retired CIA economist who played a small role in the agency's analysis of the 1973 oil price hikes. He lives in Mason Neck.)

Editor's Note: Compare gas prices in Lorton with our Traffic and Gas tab

B March 23, 2012 at 05:45 PM
So why, when something happens in the middle east region, does the price at the pumps go up immediately and then seem to take forever to come back down to what we consider normal?
Sally Spangler March 24, 2012 at 03:03 PM
Someone or organization is making one huge profit on the price of gas when 8 gallons of the stuff costs me over $30.00 two days ago! Maybe we all need to see and hear who and why the driving public is paying this huge amount for something that is causing such problems with getting around - just to the places we need to go as well as those pleasant places we like to go. STOP IT! you blank, blanks! STOP IT NOW! get down on your faces and kow tow to all of us! I've seen prices at least to mid $4.00 range. TOO MUCH! Metro is forget it. The dollar to mile is out of line. The Metro itself is in poor condition! The group of men running the Metro are like many husbands - "I'll get that done later, dear!" So the Metro is a mess and building another line at today's costs is - well STUPID! How much is the public willing to pay for transportation? Bicycles? Walking?, Oh come now! Moving government away from downtown DC? Are they really thinking that all those new buidlings full of government employees is the way to keep the terrorists guessing which act of terror is the first one to be terrorized? How stupid can you get!? Blow up the bridge that carries Metro over the Potomac or the tunnel that goes under the Potomac. Hey that will slow things down! Put a hole in 14th Street Bridge or the one over the Annacostia!
stevepolard March 26, 2012 at 04:58 AM
I blame the voters that vote in the same parties that have shown since the 1970s twice used oil scam they have done nothing to prepare us for today. http://www.machinerysearch.net
Sally Spangler March 26, 2012 at 02:46 PM
GREED! whether public or private as in oil corporations whose eye is on the dollar sign. It is their god! MAKE MORE MONEY! The public can always find a way of NEEDING gasoline - I do note that there are fewer power boats running up and down the river. I don't hear many pieces of power equipment being used in the yards up and down my street. BUT - the traffic on the roads and highways? OH YES! jamming the pavement with three and four lanes nose to tail cars with a good fill in of big trucks - taking goods to market or heading home empty. Would it ease the use of oil if the truck traffic were moved long haul by train? Then all those cars who cannot possibly stay in a lane would cause fewer accidents trying to fit their cars into a space that other cars do not want them to fill "their" space in the long line of cars wanting to do the same thing! - Steve - the voters haven't a cohesive idea of oil scam as you put it. They aren't thinking any further than their own ears on any subject oil, education in general, colleges, teachers, school subjects and the people teaching those subjects. Ah yes - new roads and highways. Bigger houses and more benefits of having a huge house to show off to the passing public or their neighbors. "People are stupid" Something to think about when you ask your government, local or otherwise for more public benefits.

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