Essay on "Why Gas Prices Have Risen in the Past Thirty Months"

Essay 4 pages (1439 words) Sources: 4 Style: APA

[EXCERPT] . . . .

Gas prices are beginning to rise again after remaining steady for a period of several months. Prices last week are now averaging $2.169 per gallon after sitting around $2 per gallon (Kahn, 2009). Crude oil prices are increasing as well, up to $58.14 for a barrel off Brent crude. Despite this recent increase, prices are substantially lower than at this time in 2008 when the price peaked in early July. The increase in crude prices has been the main driver over gas price fluctuations in recent months, if only because of the high volatility in crude prices. In practice, however, there are a wide range of variables that are responsible for gas prices. This paper will explore the different variables of gas prices and analyze their impacts on the dramatic rise, fall and rise again in gas prices.

The price at the pump reflects a variety of different cost inputs. In 2005, the price of crude accounted for 53% of the price at the pump. State and federal taxes were tied with refining costs at 19% of the price, the remaining 9% being attributable to distribution and marketing costs. The year before, the price of crude was only 47% and taxes were 23%, illustrating that this figures are somewhat volatile. The price of crude, however, is the largest component and trends around half the price at the pump.

The price of crude is determined by a wide range of factors, one of which is supply and demand. Both of these factors are global, given the global nature of the petroleum market. The United States is presently the largest consumer of petroleum. Of America's energy needs, 29% is for transportation, which is almost entirely petroleum. Industrial is 32% of America's energy needs and petroleum is the largest component of that as well (Annual Energy Review 2007). U.S. petroleum demand has increased substantially over the past several years, but there was no evidence of a spike to which the recent gas price surge could be attributed.

The demand side of petroleum is driven also by other countries. In particular to crude prices was demand from emerging economies such as China and India. This trend has been building for several years (Reuters, 2005). While India denies that its consumption is a factor (Zaidi, 2008) their claims do not address the growth rate in oil consumption, and that this outstripped expectations for a short time. China's oil consumption, for example, grew 11.9% in 2008 (Xinhua, 2009).

The supply side of crude oil is loosely controlled by OPEC. This trade group represents the interests of many of the world's major oil-producing nations. OPEC nations account for 28.74 barrels per day out of the total world estimated market of 84.18 million barrels per day. The cartel controls world oil supply and price, setting its production based on the expected production of non-OPEC producers and the expected world demand (Daya, 2009).

Crude prices are also affected by speculators on the global commodities markets. Oil is traded on commodities exchanges such as the New York Mercantile Exchange, and is typically purchased on credit (leverage). This increases the amount of oil that any one investor is able to sell. Commodities exchanges have historically been immune from speculative buying because the buyer must take physical delivery of the product. This has historically limited the market to oil companies, airlines and other major users. However, speculators have been able to enter the market, as long as they are able to unwind their positions before they are forced to take delivery. This speculation increases the volatility in the oil markets, such that over the first half of 2008 they behaved irrationally. A large number of unusual investors are recorded in this group -- the California pension fund, Harvard Endowment fund, hedge funds, sovereign wealth funds and a variety of institutional investors (Kroft, 2009).

After crude, the second largest component of gas prices are federal and state taxes. The Federal gas tax is 18.4 cents per gallon (Gaspricewatch.com, 2009). This has not changed in recent months and so is not a significant contributor to the price increase. State tax regimes vary significantly. All states have a gas tax, ranging from 7.5 cents per gallon in Georgia to 32.1 cents per gallon in Wisconsin. Many states also allow for local and county taxes… READ MORE

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