The Complexity of Energy Prices

Why Is Gasoline So Expensive and What Can We Do About It?
We are deep into the political trade-winds and there has been a lot of talk lately about the rising price of gasoline.
Interestingly enough – the cost of gasoline is not as big an economic issue as it once was. In 1981, when prices spiked following the Iranian revolution, about 5% of total national spending was for gasoline. Most recently, that same number was 3.7%. Dramatic – especially when you consider that we are driving 90% more than in 1981.
So, even though we are driving more, we are spending less as a nation. But still it is discouraging to stand by the pump and watch the price increase week by week.
There are significant complexities to oil as a commodity. The sulphur content is different depending where the oil is produced. Refining capacity varies, depending upon location – that is especially true in the US. Transportation – be it via pipe line, truck or tanker – is a consideration and a cost. All of these issues and more affect the cost and availability of gasoline.
Perhaps most basic of all is that oil is a global commodity and the price of oil is driven by the global exchanges. Action on the exchanges is premised on supply and demand – with a nod to fear, greed and speculation.
Another thing to consider: the oil produced in America does not belong to the United States. Rather, it belongs to the various mineral rights owner. Because ours is a free market, American oil “owners” are not required to sell to American refiners only and – in fact – may sell into one of the global exchanges.
Finally, there is not a tight connection between drilling and the price of gasoline. For example, since early 2009, US oil production increased 15% and prices increased from $2.07 per gallon to $3.60. Conversely, US oil production decreased from 1986 until 2009 and yet the price of gasoline dropped below $2.00.
Oil and gasoline are very complex issues – and important for our nation’s economy. However, there are no quick fixes or easy answers. We wish it were simpler but it is not.