From Discovery News, March 14, 2012 and About.com, March 10, 2012
According to the US Department Energy (USDE), the cost of crude oil accounted for nearly 70% of the cost of gasoline in 2010.
And with 43% of the world’s crude produced by the Organization of the Petroleum Exporting Countries, the USDE adds, “OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the word’s estimated crude oil reserves.” Apparently, possession is 9/10 of the right to raise prices when there’s a disruption or even threat of disruption of supply.
The quality of crude and the refining technology and methods also affect the cost, as does the cost of additives of ethanol or alcohol blended with the gasoline.
Consumers and the number of vehicles impact the price of fuel. American motorist drive nearly 3,000,000,000,000 miles per year. China and India are putting an increasing number of vehicles on the road, assuring that the price of gasoline will continue to increase in the future.
More recently, in February 2012, the possibility of the US and/or Israel taking military action against Iran boosted gas prices. Also, according to the Energy Information Administration (EIA), some US refineries were closing. And in anticipation of increased summer vacation driving, gas prices always rise in the spring.
But it’s not something magical in the spring air that sends prices upward. And it’s not necessarily supply and demand, because in the summer of 2008, though demand and supply were fairly constant, gasoline rose to $4 a gallon; oil prices zoomed up to $145 a barrel.
Consider the recession in the summer of 2009. The recession had decreased demand, yet the cost of gasoline at the pump increased.
How’d that happen?
Who done it?
Remember the .com bubble?
The housing bubble?
The asset bubble? That’s the new bubble commodities traders are creating even as gas pumps are sucking our money out of our pockets.
Supposedly, prices are affected by supply and demand—more on that later.
Oil prices are affected by oil price futures, which are traded on the commodities futures exchange. Oil prices fluctuate on a daily, even an hourly basis, not because of supply and demand but because of what investors guess the price of oil will be in the future.
And when the commodities traders think oil will be high, they bid it up even higher, causing gas prices to go higher.
So much for understanding supply and demand. In fact the only time I’ve ever understood it was when Pat Paulson, 1968 Presidential candidate and regular on the Smothers Brothers Show, explained it.
I give Paulson the final word.
He said, “When demand is high and supply is low, prices are high.
“And when demand is low and supply is high, prices are high.”