Q&A: Why gasoline prices are so high
Gasoline prices are keeping up their record-setting ways.
California drivers paid an average of $4.358 for a gallon of regular gasoline, up 6.6 cents from a week earlier, the Energy Department said Monday. That’s a fresh record high for this time of year and is 48.4 cents above the year-earlier price.
Nationally, the average rose 7.2 cents to $3.793, also a record for this week, according to Energy Department statistics. A year earlier, the average U.S. price was 27.3 cents lower.
Retail gasoline prices have jumped so quickly that some experts are rethinking their predictions on how high fuel prices could go in 2012. In California and across the nation, prices are already above levels analysts weren’t expecting to see until May.
“The rise in price is so unbelievable that we may have to revise upward our previous gasoline forecast,” said Patrick DeHaan, senior petroleum analyst for GasBuddy.com, a fuel price tracking website. The U.S. average already has surpassed the lower end of GasBuddy’s forecast for mid-May of $3.75 to $4.15 a gallon.
It could be worse. The poor soul who forgot to fuel up before reaching the Furnace Creek Inn and Ranch Resort in Death Valley on Monday would see a price of $5.87 for a gallon of regular, according to Mapquest’s fuel price service.
In New York futures trading, the U.S. benchmark West Texas Intermediate oil rose 2 cents to $106.72 a barrel. In London trading, the European benchmark Brent North Sea crude advanced 15 cents to $123.80 a barrel.
Why are gasoline prices so high?
Crude oil accounts for 80% of the pump price, so first, it’s about the price of oil. With U.S. oil trading steadily above $100 a barrel, gasoline prices are being pulled along for the ride. In 2008, average gas prices hit record highs in California and nationally at $4.588 a gallon and $4.114 a gallon, respectively, as oil soared to its highest price ever, more than $145 a barrel. And last year, West Texas oil set a record annual average at $94.86 a barrel, according to the Energy Department. That resulted in the highest annual national average ever of $3.53 for a gallon of regular gasoline.
How high will gasoline prices go?
Some analysts have said average prices could approach $5 a gallon in California and $4.50 nationally; others don’t expect to see prices above the 2008 records. Last year, prices surged in the spring and then declined by summer. In 2012, oil prices are expected to average more than $100 a barrel for the first time, which could result in a new national record average for regular gasoline of $3.55 a gallon, the Energy Department said.
Will it ever stop?
Expect fuel prices to rise and fall and rise again. The Energy Department is expecting oil to average $103.75 a barrel in 2013, with gasoline averaging $3.59 a gallon.
Why is the price of oil high?
Global demand is increasing. The International Energy Agency expects worldwide consumption of oil to grow 3.3% or 800,000 barrels a day this year. And an improving U.S. economy could ratchet up domestic fuel use even though motorists’ gasoline consumption continues to decline because people are buying smaller, more fuel-efficient cars and driving less.
Geopolitics also play a role in oil’s cost. Last year’s Arab Spring uprisings in the Middle East and North Africa roiled oil markets, especially when production was briefly halted in Libya. More recently, Iranian threats to close to Strait of Hormuz, the world’s most strategic choke point for the transport of Middle East oil, has kicked up the fear factor.
Are speculators making energy prices rise?
Investors looking for better returns on their money have a hand in driving up oil and gasoline prices. On commodity futures exchanges, hedge funds and other investors — possibly including your retirement fund — have been pouring record amounts of money into long-term bets that oil and gasoline prices will continue to increase.
“There is a large speculative element to this early rally,” said Tom Kloza, chief oil analyst for the Oil Price Information Service. “The Commodities Futures Trading Commission has seen the greatest buying skew ever among the hedge funds, commodity pools and index funds that often park money in gasoline futures and options” as well as oil futures.
Don’t we just need to drill for more oil here in the United States?
We already are. In 2011, the nation set a record for the number of oil rigs in operation. The U.S. has whittled its dependence on foreign oil down to less than 50% of its needs, from 60% in 2005. And a long-term production decline in the U.S. has been reversed thanks to new sources of U.S. crude, such as the giant Bakken oil field in North Dakota.
But if motorists are driving less and more oil is being produced in the U.S., shouldn’t gasoline prices fall?
Look to the nation’s oil refineries for the answer.
At the moment, many refineries are producing less gasoline because of routine yearly maintenance. On top of that, refineries in regions with pollution problems are undergoing their annual switch to summer gasoline from winter gasoline, mandated by air quality regulations. The annual transition is usually good for a price bump because the summer formula, designed to reduce evaporation of pollutants during warm weather, is more difficult and more expensive to produce than the winter formula.
Then there’s the matter of what type of oil the regional refineries are using. In recent months, West Texas Intermediate oil has been significantly cheaper than Brent crude. But because of pipeline transportation bottlenecks, little of that cheaper oil travels to the West Coast and East Coast. Refineries there are more likely to use imported oil. “If you live on either the East or West coasts, the oil used to refine your gasoline costs $120 a barrel or more,” said Phil Weiss, senior energy analyst for Argus Research.
So there still should be excess supply in the U.S. to drive down gasoline prices, right?
Wrong. U.S. refiners have be closing refineries in response to declining demand. In addition, refineries have been shipping record amounts of refined fuels overseas, where demand is higher. That has helped keep supplies in the U.S. relatively tight.
Why are gasoline prices in California so much higher than those in most in other states?
California’s special type of gasoline is the least polluting in the nation but is also more expensive to produce than other gasolines. California also has a limited number of refineries, leaving it subject to price surges when problems arise. Few refineries outside the state are capable of making gasoline to California’s clean-air specifications, and those that can make the gas aren’t connected by pipeline, so the fuel must make a slow and expensive journey by ship or truck.
California oil production, which peaked at 424 million barrels a year in 1985, has dropped to about 225 million barrels and is “expected to continue to decline,” according to the California Energy Commission. Production is also declining in California’s other source of U.S. crude: Alaska. To compensate, there has been a 71% increase in California’s imports of foreign oil, a trend that almost certainly will continue. The cost of that foreign oil is based on the Brent price, which now is very expensive.
Also, taxes levied on gasoline in California are on the high side.