Why Is Gas So Expensive?

Jun 19 • Energy • 2407 Views • Comments Off

Gas is expensive. Ten years ago it was between $1 and $2 a gallon – now it’s double that. What has changed? Why is gas so expensive compared to what it used to be? Are more people using it? Is there less of it to go around? Or, are we being manipulated by big oil companies into paying what they want us to pay, because they can?

pumping gas

Mike Davis / Flickr

Are More People Using Gas?Technically, the answer to this question is yes. There are more people using gasoline worldwide. Actually, there are more people using products made from the major component of gasoline – crude oil. China leads the way in increasing demand, having doubled their energy usage over the last 10 years. But, even though the actual demand for oil has gone up – it has not doubled. In fact, between 2001 and 2008, consumption increased from 77,032,000 barrels a day worldwide to 85,534,000 barrels a day, less than a 10% increase.

So, if the increase in demand is only 10%, why has the price gone up 100%? That only leaves supply as a problem. Let’s take a look and see if there is less oil being produced.

Is There Less Gas Available?We’ve seen that increased demand isn’t why are gas prices so high. So, it must be a reduced amount of production, right? Not so fast. In 2001, world oil production was 77,762,110 barrels a day – just enough to cover world demand. In 2008, oil production was 85,471,764 barrels – again just enough to handle the need of the world.

So, the supply is keeping up with the demand for oil. This means that the paradigm of supply and demand is not what is driving up the price of gasoline. What else could account for the increase? Perhaps it is the processing of oil into gasoline that has become more expensive.

Are Refineries to Blame?In the United States, we haven’t built any new oil refineries since the late 1970s. That means our current processing infrastructure is old and needs to undergo yearly maintenance. This usually happens when we change over from winter weight gasoline to summer weight gasoline. Maintenance takes about two weeks for each refinery, which generally leads to a temporary spike in gasoline prices. What it doesn’t do is make gasoline prices go up and stay up.

Prices stay high for few weeks until the supply is returned to normal and then prices return to their pre maintenance levels. This is the typical supply vs. demand curve. It is self regulating and can be seen in action every year. This is the same thing that happens when major disasters, like hurricanes in the Gulf of Mexico, limit the supply of crude oil to the refineries. But, this still doesn’t explain the 100% increase in price in the last 10 years.

Is It Possible that Big Oil Companies Are Gouging Us?The big question is why are oil prices so high if supply is equal to demand? Is there a fear that we will run out of oil in the near future? Are the big oil companies trying to make huge profits now before their industry dries up? Perhaps.

But maybe the actual reason for the huge increase in prices lies with the creation of the Intercontinental Exchange (ICE) in 2000. The ICE was founded by Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank and Societe Generale – notice anything about that. The three major oil producers and refiners, two financial institutions and two international banking giants. They made the ICE, which is an online commodities and futures marketplace that exists outside the US and operates free from the constraints of US laws. That means there is no oversight committee for them to answer to.

Here’s what the ICE allows big oil companies to do. The large oil companies trade with each other. One companies buys oil from the other at a set price while at the exact same time they sell the exact same amount of oil back to other company at the same price. No oil changes hands, no money changes hands. On paper the trade happens and it looks like there is an increase in the demand for oil. This is what has driven the price of oil and gasoline up to twice its cost in just over 10 years.

According to Philip Davis, a well known entrepreneur and columnist for Seeking Alpha, who has been studying this phenomenon, “the world is being scammed out of $2.5 trillion every year.” He also says that, “ICE can create artificial shortages and drive speculative demand in order to charge consumers an extra dollar per gallon of gas. And whereas this may not seem like much, this $1 soon becomes $50 billion A MONTH as global drivers consume 1.7 billion gallons of gas every single day.”

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