Gas Prices Are Beginning to Essay

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Few states taxes increased during the run-up of early 2008.

Refining costs also account for 19% of the price at the pump. Most refining takes place close the market, although the U.S. is served by some refineries in the Caribbean. The greatest amount of U.S. refining capacity is along the Gulf Coast (EIA, 2009). There is no evidence that an increase in refining costs occurred to justify the price increases recorded. However, there was a capacity shock during Hurricane Ike. The impending hurricane forced refineries to cease operations. The threat of supply shortages caused a rebound in prices, which had been declining over the course of the summer prior (Schoen, 2008).

The final variable, marketing and distribution costs, is often cited as a source of gas price spikes. Gasoline companies are handed significant blame, although more often than not they are merely the messenger that the public is shooting. The oil companies are buyers on the commodities market, and are as apt to be caught up on supply/demand mismatches as any other oil purchaser. The one area where oil companies do make a contribution is with percentage markups. This means the markups are higher when the price is higher and lower when the price is lower. As a consequence, oil companies make higher profits when gas prices are higher. This creates the illusion that they are controlling the prices, but that is not the case.

Of the four components of fuel prices, the most relevant remains the price of crude.

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Over the past 30 months we saw world demand surge as a result of expanding Asian economies. Supplies were not increased to match this demand, driving prices upwards. As the global economy began to falter, demand fell back in line with supply, resulting in a decrease in gas prices.

The second major factor, albeit a controversial one, is the rampant speculation on the commodities markets. Oil was rising, and speculators went to cash in. This drove the bubble of the first half of 2008. With that bubble now eliminated, the price of oil has fallen back into its normal equilibrium. This has resulted in a substantial drop in the price of crude, which in turn results in a substantial drop in price at the pump.

Other factors play a much less important role. Taxes have remained steady, so played no role in the run-up in oil prices nor in their subsequent decline. Other factor costs have remained relatively steady, barring the speculation of a supply stoppage during Hurricane Ike. So while the price at the pump cannot be attributed entirely to the fluctuations in the price of crude, there is a strong correlation. The key for consumers is to understand that the presence of speculators in the commodities markets increases the volatility in the crude oil market. As long as this is the case, and emerging nations continue to increase their consumption, the price of gas will have significant upward pressure exerted upon it.

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