Why is gasoline prices increasing?

Posted By Levi

March 19th, 2012 6:53pm

Category: Energy

The price of gasoline is steadily rising. Average price per gallon is now over $4.00.

What is driving this increase in gasoline prices? Republicans are blaming the president. They say he has not pursued policies that will allow oil companies to drill for more oil in the United States. Remember the slogan; “Drill, baby, drill.’  More oil on the market, they claimed, will reduce the price of gasoline. This argument sounds logical but it is false. More on that in a moment.

It is simply not true that President Obama’s policies have hampered oil production. In fact, the opposite is true. Oil production under Obama has gone up considerable since 2008. The United States is now producing more oil than it did a few years ago.

Here is a chart pointing to this fact.                                                                 
Republican presidential candidate Newt Gingrich says, if he is elected president, he can guarantee Americans gasoline at $2.50 a gallon. Nonsense. The days of cheap gasoline is gone forever and we better get used to it. You can drill all you want but this will not lower gasoline prices appreciably. Here is why.

Oil is an international commodity. It is bought and sold on the world market. Because of this, the price we pay for gasoline is determined primarily by the world market and not by what we do here. Therefore, if we drill every day, everywhere, offshore and onshore, it will have little effect on the price of oil.

Today the world consumes about 90 million barrels of oil a day. Whatever additional oil we can bring on the market by drilling more will be a drop in the bucket. Whatever price the world decides to pay for oil is the price we will pay.

Look at this next chart.

As you can see, both the price of gasoline and the number of oil rigs producing oil are increasing almost at the same pace. The United States is producing more oil now than before. The US economy is still struggling and as a result, the demand for oil and gasoline has fallen. 

Basics economics says if the supply of a product exceeds the demand for that product, then prices should fall. If we are producing more oil than Americans are using, why then is the price of gasoline going up instead of coming down? Because the price of oil is determined, not by how much we produced in the United States, but by the demand for oil on the world market.

The multinational oil companies are taking advantage of the higher prices overseas and are exporting the excess gasoline to several countries. In fact, for the first time in 50 years, the United States has now become a net exporter of gasoline, exporting more gasoline than it imports. As long as the demand for gasoline remains high overseas, what new oil is produced here will be swallowed up by the energy-hungry nations of India, China and others.

Many experts also believed that speculation in oil by Wall Street is driving up prices as well. Here is Robert Reich, former secretary of labor under President Bill Clinton:

“But Wall Street is betting on higher oil prices in the future – and that betting is causing prices to rise. The Street is laying odds that unrest in Syria will spill over into other countries or that tensions with Iran will affect the Persian Gulf, and that global demand will pick up as American consumers bounce back to life. These bets are pushing up oil prices because Wall Street firms and other big financial players now dominate oil trading. Financial speculators historically accounted for about 30 percent of oil contracts, producers and end users for about 70 percent. But today speculators account for 64 percent of all contracts.”

This is where the President can do something. In April 2011, he set up a Task Force to look into high gas prices at the time and to investigate and prosecute financial fraud. But nothing has happened. The president just ordered them back to work. I’m not optimistic  that anything will come of it but let’s wait and see.

Another area where the president can do something to moderate the increase in oil prices, is to ease up on all this war-talk with Iran. Every time the United States ratchets up its threats against Iran the oil market becomes nervous and creates instability in prices.

 

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