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Question Q&A: What's Behind High Gas Prices? post #1  quote:



Q&A: What's Behind High Gas Prices?
by Scott Horsley
NPR

What factors are causing gas prices to rise so quickly?

The biggest factor in rising costs is the price of crude oil, followed by the cost of refining.

If a gallon of gasoline costs $2.90 (this week's average, according to the Energy Department), crude oil accounts for about $1.60. The cost of crude oil on the futures market has risen about 33 percent in the last year. This reflects supply problems in such places as Nigeria, Iraq and the Gulf of Mexico, as well as the threat of supply problems in Iran.

Refining costs add another 64 cents or so to a gallon of gasoline. Refining margins have increased from a few years ago, and are especially high this spring, because many refineries are currently shut down for seasonal maintenance. Refineries are still recovering from the effects of last year's hurricanes. And they are adjusting to more stringent low-sulfur fuel requirements and the phase-out of the gasoline additive MTBE.

The balance of the price is taxes -- about 55 cents -- and distribution and marketing costs, which account for about 11 cents per gallon.

OK. So the rising cost of crude oil and of refining help account for the spike in gas prices. But at the same time, oil companies are reporting record net profits. They're being accused of price gouging. What's their response?

Big oil companies are making most of their money by producing crude oil. They invested in oil fields when prices were much lower, with the expectation that they could break even at, say, $25 per barrel. Since the market price is now more than $70 a barrel, the extra money is gravy. It's like a farmer who can raise corn for $1.50 a bushel. If the market price is $1.75, he makes a quarter per bushel. If the market price jumps to $2.25, his profits jump as well. (If the market crashes to $1 per bushel, the farmer loses money. That can happen to oil companies as well.) Oil companies, like the farmer, are the beneficiaries of high market prices, but they can no more control those prices than a farmer can dictate what he gets for a bushel of corn.

Critics would say the oil industry is far less competitive than the corn market, which is certainly true. But if oil companies could control the price of crude oil, they would not have allowed the price to fall to $10 a barrel as it did in 1998.

Then who sets the prices?

Oil companies don't set crude-oil prices; the global market does. Basically, the market decides what people are willing to pay at a certain moment in time. And a lot of that has to do with the fact that the world is getting richer. Countries like India and China are growing, and that has created more demand for oil and gas. In the United States, we're still going full throttle when it comes to energy use. At the same time, there have been supply disruptions and political instability in major oil-producing nations. So you have a situation where demand has been growing steadily and inexorably, and the system of supply is quite vulnerable. That's the basic recipe for high prices.

Are prices really that high when compared to other countries or to the gas crisis of the late '70s and early '80s?

Gasoline prices have increased sharply in the last two years. But over a longer period of time, the prices of other goods have increased even more. In March of 1981, the average price of gasoline nationwide peaked at $1.42 a gallon. If gasoline prices had simply risen at the same rate as other goods since then, the average price today would be $3.08. (Although gas prices are higher than that in some areas, the national average is still about 18 cents shy of the all-time high.)

Drivers in some other countries have it worse. Gasoline prices in the United Kingdom, Italy and the Netherlands are at least twice as high as those in the United States. (But drivers in oil-rich countries such as Kuwait, Nigeria and Venezuela pay less than a $1 a gallon for gas.)

Is there any evidence that people are starting to change their habits in response to higher prices?

When you ask drivers at the gas station, "Are you trying to conserve?," they invariably say they are. But weekly data from the Energy Department show that we're still using more gasoline than we were a year ago. It's likely that the pace of growth has slowed because of the high price.

It also appears that people shopping for new cars are paying more attention to fuel economy than they were a few years ago. Buyers of hybrid and fuel-efficient diesel cars are already eligible for tax breaks, and this week President Bush called on Congress to expand those.

The Bush administration is supporting an investigation into possible price gouging. Meanwhile, some members of Congress are talking about a windfall profits tax. Will those measures help?

The government has conducted numerous investigations of suspected "price gouging" in the past; it usually finds that market forces of supply and demand, not illegal market manipulation, are responsible for high prices. The idea of a windfall profits tax was raised last year and went nowhere. Oil companies say taxing their profits would limit their ability to invest in new oil fields or refineries, although at least one proposal, from Sen. Byron Dorgan (D-ND), would tax only those windfall profits that were NOT reinvested.

Are there any short-term fixes?

The market solutions are: a) increase supply; and b) decrease demand. The seasonal crunch in refining capacity should ease in the next few weeks. But unless peace suddenly breaks out around the globe, crude oil supplies are likely to remain tight. So decreasing demand is our best hope in the short run.

What about long-term fixes?

They're the same: increase supply and decrease demand. But in the long term, we have more opportunities to do this, by developing new oil fields, building new refineries, replacing gas guzzlers with gas sippers, and searching for alternative fuels.

---------

-HECK!


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post #2  quote:

Consider I used to pay less for a gallon of gas than the government charges for the taxes on that gallon. I remember back when gas was between 25 to 50 cents a gallon.

But really it's the world market. The world market is willing to pay those high prices so the price goes up. The new buyers that are driving up gas prices are India, China and Africa. Those countries are buying more cars and the demad is up. So in order America to grab that oil our oil buyers are paying big bucks. Gas goes to the highest bidder, right?

But then look at the oil companies which are making record profits. Why because they aren't dictating the price of oil. I'm not sure when that changed. We are paying what the market dictates not what the oil companies dictate.

Now let me ask this, how many oil wells have you driven by in the U.S. that are sitting idol? Why are we not drilling in the Gulf, in Anwar?

IT will take a good 10 years to convert everything to alternative fuel. What do we do until then?


Old Post 04-27-2006 11:02 PM
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post #3  quote:

quote:
Edward Teach said this in post #2 :
Now let me ask this, how many oil wells have you driven by in the U.S. that are sitting idol? Why are we not drilling in the Gulf, in Anwar?


Congress will not allow drilling in Anwar because a perception has been created by environmentalists that doing so would destroy a fragile, paradise-like setting. The same reason applies to drilling in the gulf. Although I understand that Cuba intends to drill in gulf waters that are closer to the U.S. than what we are allowed to drill. Cuba is going to partner with China because China can supply the hardware, and China needs the oil. Maybe China will sell us a little of our gulf oil.


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post #4  quote:

Well drilling in ANWR and the Gulf won't do anything for now, and you'd be looking years down the line. So why not just switch over to another system? Passing a bill today won't mean oil is pumping tomorrow.

Old Post 04-28-2006 06:54 AM
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post #5  quote:

quote:
Inner City Blues said this in post #4 :
Well drilling in ANWR and the Gulf won't do anything for now, and you'd be looking years down the line. So why not just switch over to another system? Passing a bill today won't mean oil is pumping tomorrow.


True, it will take a lot of lead time to get oil from an new source. However, we have a market at work here, and if congress passed a bill to allow the development of a new source of oil, it would lower the price to some extent that very instant. It may not be possible to attribute or even quantify, but it would happen.

It works the same way when the president of the country that consumes the most oil says that it is addicted to oil. It sends a signal of scarcity through the market that drives up price.

And it also works that way when that same president announces the the U.S. will either draw down or withhold contributions to its strategic reserves. On one hand, it puts a little more oil on the market to drive down prices, but on the other hand, it sends a signal to the market that there is such significant scarcity that the great U.S. is desparate enough to compromise its strategic reserves.

With those two opposing effects, I would speculate that the signal of scarcity would raise the price more than the additional oil would lower it.


Old Post 04-28-2006 01:56 PM
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post #6  quote:

I say why be so concerned with short-term benefits and just make a move for the long haul?

Old Post 04-28-2006 04:54 PM
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post #7  quote:

quote:
EUCLID said this in post #5 :


True, it will take a lot of lead time to get oil from an new source. However, we have a market at work here, and if congress passed a bill to allow the development of a new source of oil, it would lower the price to some extent that very instant. It may not be possible to attribute or even quantify, but it would happen.

It works the same way when the president of the country that consumes the most oil says that it is addicted to oil. It sends a signal of scarcity through the market that drives up price.

And it also works that way when that same president announces the the U.S. will either draw down or withhold contributions to its strategic reserves. On one hand, it puts a little more oil on the market to drive down prices, but on the other hand, it sends a signal to the market that there is such significant scarcity that the great U.S. is desparate enough to compromise its strategic reserves.

With those two opposing effects, I would speculate that the signal of scarcity would raise the price more than the additional oil would lower it.
You are absolutely right as for the market. And it's correct that it's controlled by congress not the president although the president controls the Strategic Reserves. Yes it's short term but it means that it will drive down the price of a barrel just on perception.

Think if the President were able to announce the following.

1. Tapping into the Strategic Reserves
2. Open up drilling in Anwar and the Gulf of Mexico
3. Start up idol refineries in the US
4. Tax breaks for the development of alternative fuel development.
5. Reduction in purchasing from foreign sources like OPEC and Venezuela.

I'm sure there are more that I can't think of right off.


Old Post 05-01-2006 11:04 PM
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post #8  quote:

quote:
Edward Teach said this in post #7 :


Think if the President were able to announce the following.

1. Tapping into the Strategic Reserves
2. Open up drilling in Anwar and the Gulf of Mexico
3. Start up idol refineries in the US
4. Tax breaks for the development of alternative fuel development.
5. Reduction in purchasing from foreign sources like OPEC and Venezuela.

I'm sure there are more that I can't think of right off.


You would see the price start to fall immediately. The market bets on the expectations of future supply as well as existing supply.


Old Post 05-01-2006 11:23 PM
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post #9  quote:

Yeah that's what I'm talkin' bout. And there could be many more announcements and I think all of them would affect the price of a barrel.

Old Post 05-03-2006 10:02 PM
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post #10  quote:

Easy answer for an ez question

Greed.


This is how bad it is. In my state, if i go out and buy a hybrid, i have to PAY a frelling gas tax to make up for using less gas. How retarded is that? And it goes to the oil company. What's the point in owning one if i have to pay nearly 1000 dollars a year for owning a hybrid?


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Q: What's Behind High Gas Prices? post #11  quote:

A: Market Demand.

Now try and stay with me. Sam has a cool set of baseball cards and Tim, Alex and Josh all want them. Josh offers Sam $10 for the set. Tim offers Sam $20. Alex is willing to pay $25. Who does Sam sell his baseball cards to? Right! Alex, of course. Greed? I think not. Free enterprise is a wonderful thing. And the world marketplace is founded on it. Of course, lefties and communists would beg to differ.


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post #12  quote:

Well I don't think the communists would agree with that after all they are willing and have the cash avaialable to pay more for oil than the US.


But there are other factor and it is not really demand when you consider that OPEC countries set the price for exported oil and they don't sell to the highest bidder which is good news for the US.


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post #13  quote:

quote:
lodgebo said this in post #12 :
Well I don't think the communists would agree with that after all they are willing and have the cash avaialable to pay more for oil than the US.





Old Post 10-04-2006 12:14 AM
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post #14  quote:

Don't understand joe well like your market demand it isa simple economics.

America right now is economically stable but there has been a few bad patches in recent years also the simple fact is that FDI ( a good source of income has fallen and also the fact that war is an expensive business means that at this paticulr time the US can't afford to pay over the odds for anything.

China on the other hand is going through an economic boom it was helped by the fact that it was the only country not to be affected by the market crash of the 90's, FDI is going through the roof and the Chinese may be the first ever country to turn away outward investment, manufacturing is good and there is a high level of concumer confidence.

Also you may remeber when oil was i excess of $50 a barrel the Chinese did not moan like the Americans they happily paid for it. Though to be fair to the Chinese while they can afford it they are not planniung to rely on it long term as they are looking at other sources of power.


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post #15  quote:

one word: greed. greed by
1) oil producing countries- they want as much as they can get (naturally)
2) oil companies- same with them
3) governments- their whole purpose is greed
also, the demand for oil in india and china is growing exponentially, the supply is actually declining, and rising prices are the result. america used to produce most of the world's goods, and consumed most of the world's oil- mostly domestic. now, the US imports most goods, as well as 75% of the oil it consumes. using so much of the world's oil is no longer justified, or affordable.
although i love driving, and love my car, i think that the higher oil prices are not all bad. until we start producing more of the goods we consume, exporting more goods and importing fewer goods, importing less oil is a must. high prices will ensure that is the case. when we can justify more oil consumption financially, we will have more oil.


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