The Real Reason Gas Prices Are Rising - Essay Example

Gasoline prices always rise during the summer when demand is highest. Unfortunately for anyone who buys gas, the prices is already going up at the pump and it’s barely spring. The potential for prices to go even higher will affect not only the average consumer but the world’s economy and the fortunes of political leaders as well. The fragile economic recovery following the Great Recession of 2008 is in jeopardy, much of it depends on consumer confidence which is quickly falling as gas prices rise. President Obama concluded a multi-city energy tour last week in an effort to boost that confidence but the nation’s leader can do little to reign in prices, or so we’re told. Predictably, Obama is being attacked by the Republican opposition for not doing enough to control prices and for what they deem a flawed energy policy which, if corrected would drop prices to what GOP Presidential candidate Newt Gingrich claims could be $2.50 per gallon. The price of gas is determined by mainly by world politics; make that Middle East politics, speculation and forces of supply and demand. This discussion will address these and other, possibly less obvious, factors that determine the price of a gallon of gas. As consumers pump gas into their vehicles the dollar amount is literally right in front of their eyes as the digital display quickly calculates the total. People feel they are being taken advantage of when that number increases every week for the same amount of product. Some blame oil companies, others their local gas station or regional oil refineries. While all of these entities profit from gasoline none are the real culprits, none have much, if anything, to do with the escalation of prices. The global demand for refined gas does have a major impact. In other words, the person pumping their gas is more to blame than oil companies. During the recent recession the demand for gas dropped because unemployed persons don’t drive to work and fewer were taking a vacation. As the recovery is taking hold worldwide the demand goes up along with prices. (Faucon, 2012). “Analysts warn that oil could become even more expensive in the second half of the year as supplies struggle to catch up with rising demand.” The average consumer would be better served to pump their gas into a more fuel-efficient vehicle. This would lower demand therefore the price. (Motavalli, 2012). During his cross-country energy tour Obama called for Congress to stop subsidizing the enormously prosperous oil companies with billions of dollars in tax breaks. During his weekly radio address, the President said lawmakers “can can either stand up for oil companies, or they can stand up for the American people.” (Jackson, 2012). That certainly appears to be a sensible request but it won’t affect gas prices. Speculation or “betting” on prices by traders on Wall Street is the greater culprit. The amount of money that is currently moving from hedge funds and commodity investments into oil options and futures greatly impact prices at the pump. (Whitney, 2012). A commissioner on the U.S. Commodity Futures Trading Commission, Bart Chilton, says that a great deal of the problem is in fact “made in the USA,” created by traders on Wall Street. Though the markets are driven by speculation “it’s the excessive speculation we are concerned about” Chilton told ABC News. A handful of people are making money by betting on future oil prices while the average consumer is paying more. The CFTC is currently trying to apply caps oil futures speculation. (Greenblatt, 2012). The Federal Trade Commission has been keeping a watchful eye on gasoline refineries for signs of anticompetitive actions and/or price manipulation. “We have found some anomalies among refineries. Their utilization rates are going down. Their profits are going up” FTC Chairman Jon Leibowitz informed Congress. However, Leibowitz emphasized that the price of oil is determined more by the world market according to past FTC studies into gas price hikes. Some experts contend little evidence can be found that oil speculation is a major player in the price of gas. Prices are rising due to an increasing demand in highly populated developing nations such as India and China in addition to the volatile situation in the Middle East. (Doering, 2012). The demand had dropped slightly in the U.S. but that decrease is being more than accounted for by the rising demand in these other countries. This global increase in demand is increasing prices at the pump. The fear of an interruption in Middle Eastern oil supplies is also keeping oil prices at higher levels. (Kahn, Krisher, 2012). The benchmark price of American crude oil was $107.07 per barrel last Feb. 29, approximately four dollars more than on Feb. 29, 2008. Oil prices swelled to more than $145 later that year while gas prices surged past $4 by July. That year, despite a lowered demand for gas in the U.S. and Europe, demand for gas was rising at a past pace in India and China which limited global oil supplies. During this time oil output in producing countries was declining. A similar scenario is occurring again this year. Lowered demand in the Western nations would have lowered prices but higher demands in developing countries combines with lower output sent pump prices soaring. (“Oil,” 2012) Many counties are hoarding oil supplies. In addition, sanctions imposed by the U.S. are resulting in Iranian production falling, by 300,000 barrels a day by some estimates because of fewer buyers. Political conflicts in Yemen, Nigeria and Sudan are also disrupting the flow of oil leading to higher global prices. What politicians on either sides of the political fence do not seem to understand or at least are not articulating is that domestic policies are not the main reason gas prices are high and changing those policies will do little if anything to drive then downward. Gas prices are determined by oil prices which are rising because of fears involving the current tensions in the Middle East, specifically Iran. (Hargreaves, 2012) The potential military actions threatened by Israel in response to the suspected Iranian nuclear weapons program are the culprit. Iran has threatened to blockade the Strait of Hormuz, the pathway into the Persian Gulf, an action that would instigate a quick military response by the U.S. Navy. Approximately 20 percent of the world’s oil passes through the Strait of Hormuz. Cutting off this supply would send gas prices soaring even further. (“Gas prices,” 2012). The futures market would react; probably over-react, to any skirmishes between the U.S. and Iran. In an interview with CNBC, U.S. Treasury Secretary Timothy Geithner said “Iran's doing some saber rattling, and that’s causing a little uncertainty.” Geithner added that economic growth in the U.S. and other countries, though slow and steady, is influencing oil prices due to an increase in confidence. (Roth, 2012). No military actions have been taken regarding Iran but the “tough talk” on both sides has caused the price of oil to rise 20 percent. According to some, gas prices are high because the U.S. isn’t utilizing its own resources sufficiently by drilling for more oil. “Drill Baby Drill” was the familiar mantra at the 2008 Republican National Convention. The phrase was repeatedly chanted by the crowd although the facts didn’t support their erroneous claim. Following an analysis of oil production compared to gas prices the past 36 years, the Associated Press (Gillum, Borenstein, 2012) found no statistical connection between the cost of gas at the pump and the amount of oil pumped in the U.S. Four independent statisticians found the same result. America has produced more oil over the last three years while gas prices have increased. “Since February 2009, U.S. oil production has increased 15 percent when seasonally adjusted. Prices in those three years went from $2.07 per gallon to $3.58.” (Winter, 2012). Drill, baby drill became spill, baby, spill following the 2010 BP oil disaster only to pay, baby, pay at the pump. Oil production in the U.S. today is similar to March 2003 levels when a gallon of gas cost $2.10. U.S. oil production has almost no influence on gas prices because oil is produced and traded by the global community. Dynamics well beyond U.S. control determines the price of gas. Refineries stop operations every spring to change-over to the required summer formula. During this time existing supplies of winter gas is sold but sometimes that existing supply runs low meaning there is less supply therefore higher prices for the consumer. In addition, summer gas is more expensive to refine. “The government mandates that it contain less butane and other cheap organic compounds because they contribute to the formation of ground-level ozone, a primary constituent in smog.” (Fouhy, Kahn, 2012). This formula requires more oil to be used per every gallon of gas produced. More people travel during the summer which elevates demand, another certain cost increase factor. Every summer experiences a rise in gas prices but this year supplies will be further limited due to several refineries closing either permanently or temporarily because they are losing money, according to the owners. In the average year, prices should be somewhat stable during the winter months but this year prices climbed by 6 percent last month alone, an ominous indication for this summer’s prices. Two refineries in the mid-Atlantic region of the country have closed permanently. Another refinery will cease operations the summer. (Brunell, 2012). Sunoco is will shut down one of its larger refineries mid-summer “taking another 335,000 barrels per day in production capacity off the market.” (Prentice, 2012). BP’s Cherry Point refinery will be closed for an undetermined time due to fire at the Washington State facility which had been refining 230,000 barrels of oil per day. Additionally, Petroplu, a Switzerland company recently stopped production at five of its oil refineries. Europe exports a considerable quantity of refined gas to the U.S. (Brunell, 2012). Credit card companies seem to make a profit from gas that is more than their share, certainly more per gallon than the gas station makes. These companies make from eight to 10 cents per gallon and when the price of gas rises they make more per gallon. “The more expensive gas is, the more money they make off each transaction since their fees are based on a percentage of each sale” (Parker, 2012). The station owner makes two-to four cents per gallon after paying the card company fees. These owners earn even less when prices rise due to competition with other stations. To reduce these costs some gas retailers offer a discount for cash which lowers the price of gas to the consumer and adds to their bottom line too. (Parker, 2012). Fuel–efficient vehicles are ultimately a large piece of the puzzle to lowering gas prices on a more permanent basis. However, in the short term driving these cars may be costing us, particularly those not driving electric or hybrid-electric vehicles. Because these cars use less gas, the states are collecting less tax revenue from the sale of gas. States have been quietly raising this tax and discussing ways charge hybrid car owners a separate tax. At present owners of gas guzzlers are subsiding the States tax coffers while hybrid owners pay less for fuel. Maybe that’s the way it should be. (Motavalli, 2012). The economic forces of supply and demand, foreign consumption and politics, speculation, refinery closings, credit card companies and even hybrid-electric cars contribute to higher gas prices. The main culprit is fear. Speculators and buyers are justifiably worried about events in the Middle East. Iran is a major oil producing nation and although the U.S. loses practically nothing if Iran were to stop producing entirely, other oil thirsty nations such as India and China would be forced to buy elsewhere thereby increasing demand and raising the prices. Many say the President can’t do much to lower the price of gas. It that were true, they say, every president would reduce the prices during an election year. However, Obama could act to reduce speculator’s influence on oil prices and stop the angry rhetoric towards Iran plus end the economic embargo. That alone would bring down prices immediately. Works Cited Borenstein, Seth and Gillum, Jack. “Fact Check: More US drilling didn't drop gas price.” Bloomberg Businessweek (March 21, 2012) March 25, 2012 < http://www.businessweek.com/ap/2012-03/D9TL1BO00.htm> Brunell, Don. “Washington View: Rising gas prices threatening U.S. economic recovery” The Columbian (February 28, 2012). March 25, 2012 < http://www.columbian.com/news/2012/feb/28/rising-gas-prices-threatening-us-economic-recovery/> Doering, Christopher. “Lawmakers urge crackdown on oil speculators.” Reuters (March 5, 2012). March 25, 2012 < http://www.reuters.com/article/2012/03/05/us-regulation-gasoline-congress-idUSTRE8241C420120305> Faucon, Benoît “Rising Demand for Oil Spells More Price Pain” Wall Street Journal (February 27, 2012. 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March 25, 2012 < http://www.forbes.com/sites/eco-nomics/2012/03/05/five-reasons-gas-prices-rise/> “Oil and Gasoline” New York Times (March 25, 2012) March 25, 2012 < http://topics.nytimes.com/top/news/business/energy-environment/oil-petroleum-and-gasoline/index.html> Parker, Greg. “The reasons behind rising gas prices.” Savannah Morning News (March 12, 2012). March 25, 2012 Prentice, George. “Gas Prices Still Going Up, Refineries Shutting Down” Boise Weekly (March 18, 2012). March 25, 2012 < http://www.boiseweekly.com/CityDesk/archives/2012/03/18/gas-prices-still-going-up-refineries-shutting-down> Roth, Zachery. “Geithner says Iran’s ‘saber-rattling’ is behind spike in gas prices” Yahoo News (February 24, 2012). March 25, 2012 Whitney, Valerie. “Gasoline prices going up, up, up in Volusia, Flagler” The Daytona Beach News Journal (March 2, 2012). March 25, 2012 < http://www.news-journalonline.com/news/local/east-volusia/2012/03/02/gasoline-prices-going-up-up-up-in-volusia-flagler.html> Winter, Michael. “Analysis: More drilling hasn't lowered gasoline prices” USA Today (March 21, 2012). March 25, 2012 < http://content.usatoday.com/communities/ondeadline/post/2012/03/analysis-more-drilling-doesnt-lower-gasoline-prices/1#.T26mA9m-xoM> Read More