Stumped by gas prices? You're probably not alone
Published June 28, 2004

Prices at the pump have stabilized for the moment, it seems, but they still remain high. When gas prices are fluctuating, going up and down and up some more, consumers at the pump are left wondering what the heck is going on. I know I did. A little research has shed a bit of light on the subject.

Gasoline is derived from petroleum, crude oil that rests in deposits deep below the surface of the earth. Some areas are blessed with relatively easy access to these deposits—the United States has large reserves, as does Russia, while Saudi Arabia, Iran and Iraq control vast quantities of the stuff; Venezuela also sports large supplies, as do Canada and several European countries bordering the North Sea; Indonesia and Nigeria are also large contributers to the worldwide supply. A network of pipelines and massive ships connects these suppliers with their customers around the world.

About 40-45 percent of the cost of your average gallon of gas is a direct result of the cost of crude oil. Crude oil prices have been at record highs this spring, and some of that price has translated into increases at the pump. Why are crude prices rising? It's easy to blame the oil cartel, OPEC, for the rise, but there are other factors. Demand is starting to outstrip supply; China especially is using more and more oil every day. Supply problems are also related to terrorism; attacks on pipelines and ports in Iraq are now common, and militants in Saudi Arabia are doing their best to slow production there as well. Estimates of the “terrorism premium” on a barrel of crude range from $4 to $8.

Things just get worse as the oil moves from the pumping fields. Tanker ships are in short supply these days; increasing stringent—and very necessary—environmental regulations have led to a backlog of ship construction. If terrorists start attacking tankers, matters will go from bad to worse.

Next stop: refining. You can't just pump crude oil into your car; the stuff needs to be refined into the clean, specially-formulated, lead-free gasoline that modern cars require to run. This step accounts for something like 20 percent of your final price, but spikes in price related to refining are quite common. The refining infrastructure in this country is pressed to its limits (does this sound like a familiar theme by now?). Since 1980, we've lost more than 50 percent of our refineries, with actual capacity decreasing from 18.6 million barrels a day to 16.5 million; in the same period, demand has increased from 115 billion gallons of gas a year to 160 billion.

To make matters worse, gasoline in this country is not freely interchangeable: gas made for the California market can't be sold in other states because each state has its own set of regulations on gas content. So, if refineries in California stop working for any reason, that state is effectively crippled, because no other refineries can immediately take up the slack. This is true in many other regions of the county as well--there are currently at least 20 different formulas being produced in the United States.

There's even more: switching from winter gasoline blends to summer formulas costs production at refineries. Low inventories, combined with increasing demand, raise prices even further. Then we add in taxes, which account for nearly 30 percent of the cost of your average gallon of gas, and we're paying nearly two dollars a gallon.

Our economy is closely tied to the cost of oil and gasoline. Every price spike brings increases almost across the board. Why? Trucks carry the large majority of freight in this country, and trucks drive on diesel fuel. A rise in the price of diesel ripples through the whole economy, driving up prices in nearly every other consumer good. It's not difficult to see how easy it would be for the price to rise even higher than it is now, how small a push it would take to deliver a brutal blow to our country and our way of life.

This is not a tenable situation. Aside from the economic risk, even optimistic estimates predict that we'll run out of oil within 50 years. The alternative would cost more in the short term, but would carry the greatest long-term benefit: move us to a less oil-dependent economy. Increase access to mass transportation, not just locally, but for long-distance travel. Create an infrastructure to phase out trucks as the main mode of goods transport, replacing them with more efficient long-distance modes of carriage, like trains.

The United States produces some 8 million barrels of oil a day—let us make this our goal. Reducing our consumption (currently at 20 million barrels a day) to this level would benefit the environment, the economy and our national security. It would also start us on a path to move beyond fossil fuels--we'll need to do so anyway. Let's start now.