Why Are Gas Prices Rising?

A Global Commodity

A host of factors, many of them uncertain, affect the price of crude oil and the products made from it.

The roller coaster rise and fall in gasoline and diesel prices over the last few years tracks changes in the cost of crude oil. Those changes are determined in the global crude oil market by the worldwide demand for and supply of crude oil. Weak economic conditions in the U.S. and around the world in 2008 and into 2009 led to less demand, which helped push prices down. With the worldwide economic recovery under way, demand is on the rise again but unrest in the Mideast and North Africa has put supplies at risk. This combination of rising demand and reduced supply helped to push prices higher.

Crude oil prices are set globally through the daily interactions of thousands of buyers and sellers in both physical and futures markets, and reflect participants’ knowledge and expectations of demand and supply. In addition to economic growth and geopolitical risks, other factors, including weather events, inventories, exchange rates, investments, spare capacity, OPEC production decisions and non-OPEC supply growth all figure into the price of crude oil.

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Rising Global Demand

World oil consumption is expected to grow as the global economy rebounds.

The world’s demand for oil increased sharply for several years, peaking at 86 million barrels per day in 2007. However, the global economic slowdown in recent years reversed this trend and demand fell for two consecutive years to just 85 million barrels per day in 2009, or 1 million barrels per day less than at its peak before rebounding in 2010. The Energy Information Administration expects growth to accelerate over the next two years reaching 88.8 million barrels per day in 2012 and nearly 89.7 million barrels per day in 2013.

The EIA projects consumption in the Organization for Economic Cooperation and Development (OECD) countries to be nearly flat in 2012 and 2013. Growth is concentrated in the non-OECD countries, including China, Brazil, and the Middle East with world gains of about 0.8 million barrels per day expected in 2012 and another 0.9 million barrels per day in 2013.

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Supply

Surplus crude oil capacity is expected to increase.

The amount of surplus crude oil capacity, which is the amount of oil available to meet surges in demand or disruptions in supply, increased in 2009 as demand for crude oil declined along with the global economic slowdown. EIA projects that OPEC surplus production capacity will increase from about 2.3 million barrels per day in 2012 to 2.6 million barrels per day at the end of 2013.

We produce 55 percent of all the oil and petroleum products we consume. The rest is imported, with most of it coming from our neighbors in North America. In fact, Canada is the largest supplier to the U.S., accounting for 29 percent of our imports compared to 14 percent for Saudi Arabia. One way to enhance our nation’s energy security is to continue to diversify our sources of supply.

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Risk

There are accumulating risks to the development of oil and natural gas.

The National Petroleum Council (2008) examined a broad range of global energy supply, demand and technology projections through 2030 and concluded that “the world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically.” These risks include political instability in the Middle East and North Africa, the resurgence of resource nationalism in Latin America, civil unrest in Nigeria, piracy off the African coast, transit vulnerability in the Caspian, energy subsidies in Asia, extreme weather around the world, and restricted access to resources in the U.S. These risks create significant challenges to meeting projected energy demand.

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Exports?

Increased exports are good for America and the world.

American exports are not causing gasoline prices to rise. Less than 10 percent of U.S.-produced gasoline and diesel is exported. U.S. refiners produce fuels primarily for American markets and always have. More importantly, the U.S. has a long history of exporting some fuels and importing others to balance global demand, which benefits the consumer. The U.S. comes out ahead trade-wise because finished petroleum products that are exported are higher value than the imported crude used to make them. So this helps lower the trade deficit.

Exports also mean jobs for Americans, including well-paying U.S. refinery jobs that are maintained when demand for certain refined products is low in this country. The challenge is for Washington to adopt energy policies that will benefit U.S. consumers and preserve a strong domestic refining industry.

Source: EIA Complete Monthly Data for 2011. Accessed 3/8/2012.

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Where Does My Money Go?

Most of what Americans pay at the pump for gasoline is the cost of the crude oil used to make it, which is why global demand and geopolitical factors are so important.

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Prices at the Pump

Pump prices: A fractional story.

The biggest single component of retail gasoline prices is the cost of the raw material used to produce the gasoline – crude oil. That price has been between $80 and $120 a barrel, depending on the type of crude oil purchased. With crude oil at these prices, a standard 42-gallon barrel translates to $1.90 to $2.85 a gallon at the pump. Excise taxes add another 49 cents a gallon on average nationwide. So the price for gasoline is already at $2.40 or more per gallon even before adding the cost of refining, transporting, and selling the gasoline at retail outlets. Taken together, crude oil costs and taxes account for more than 74 percent of what people are paying at the pump. That leaves just 26 percent for the refiners, distributors, and retailers.

Source: EIA estimate based on average price of $3.71 per gallon, March 2013.

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Gasoline Taxes

One reason the price of gasoline can vary by state is state taxes.

The average nationwide tax collected on each gallon of gasoline sold at the retail station is 49.5 cents. Of that, 18.4 cents per gallon goes to the federal government; the rest ends up in state and local government coffers.

The amount of gasoline taxes collected by states can vary widely, from just 26.4 cents per gallon in Alaska, to as much as 69.6 cents per gallon in New York.

In addition to excise taxes, other taxes can also apply, such as sales taxes, gross receipts taxes, oil inspection fees, county and local taxes, underground storage tank fees, and other miscellaneous environmental fees. These additional taxes contribute to the difference collected among states.

Source: API

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Profits

Oil industry profits are comparable to those in most other industries.

The oil and natural gas industry is one of the world's largest and most capital -intensive industries. It has to be to effectively compete for global energy resources. The industry's earnings make possible the huge investments necessary to help ensure America's energy security. The latest data for the first quarter of 2012 shows the oil and natural gas industry earned 7.5 cents for every dollar of sales, compared to 8.9 cents for every dollar of sales for all manufacturing. Other sectors, such as the pharmaceutical, computer and the beverage and tobacco industries, earned three times that and more.

Source: Based on company filings with the federal government as reported by U.S. Census Bureau and Standard & Poor's Research Insight.

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How Can I Save at the Pump?

There are relatively easy ways everyone can lessen the impact of fuel costs.

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Fuel-Saving Tips

How to save at the pump and beyond.

We count on our cars to get us where we want to go, when we want to go. That sense of freedom is important to us, but we also want to be sure we do our best to conserve natural resources for future generations. Here are a few simple steps you can take to meet these goals.

Have your car tuned regularly. An engine tune-up can improve car fuel economy by an average of 1 mile per gallon.
Keep your tires properly inflated. Underinflated tires can decrease fuel economy by up to 1 mile per gallon.
Slow down. The faster you drive, the more gasoline your car uses. Driving at 65 miles per hour rather than 55 miles per hour reduces fuel economy by about 2 miles per gallon.
Pace your driving. Pace your driving. Unnecessary speedups, slowdowns and stops can decrease fuel economy by up to 2 miles per gallon. Stay alert and drive steadily, not erratically.
Use your air conditioner sparingly. The use of air conditioning can reduce fuel economy by as much as 2 miles per gallon at certain speeds and under certain operating conditions.
Avoid jackrabbit starts. Abrupt starts require about twice as much gasoline as gradual starts.
Plan your trips in advance. Combine short trips into one to do all your errands. Avoid traveling during rush hours if possible, to reduce fuel consumption patterns such as starting and stopping and numerous idling periods. Consider joining a car pool.

FAQs

Below, we've listed some of the most-asked questions about gas prices. Click through the links to discover the answers at EnergyAnswered.org, a project of Energy Tomorrow dedicated to answering your most burning questions about the oil and natural gas industry. Have a question for us that hasn't been answered yet? Submit it here.