:: FAQs
on Gas Prices ::
Introduction
The rising price of
gasoline continues to be one of the issues I am hearing about the most
from constituents in the 4th district – and that is understandably so.
The concern over gas prices is widespread and having an impact on
almost everyone. I appreciate the e-mails, phone calls, and letters
that I have received on this issue and I am devoting a significant
amount of time to researching and addressing this. Many of those I
have heard from have expressed their desire to understand why gasoline
prices have risen so quickly.
The
price
of gasoline at the consumer level is the result of a combination of
factors. These factors include breaks in the distribution network, as
we saw happen in the aftermath of Hurricane Katrina and general
instability in major oil producing regions such as South America and
the Middle East. Combined with increased demand around the world and
state and federal taxes averaging nearly $.60 per gallon, gas prices
have reached all time highs.
This edition of the
Capitol Monitor has been designed to answer the most common questions regarding gas prices that are coming into my office. Please take a moment to review this publication and to also visit my website at
www.house.gov/forbes
to share your thoughts and concerns on gas prices and what you are
experiencing in your community and how it is impacting your family or
business. I look forward to hearing from you.
Why have gas prices risen so dramatically over
the last couple of years?
The Recent History of Gas
Prices
A large number of
factors combine to exert pressure on gasoline prices in all
parts of the country. Some of these factors have affected the
price of crude oil and others the cost of producing and
marketing gasoline.
In the past month, there
has been a dramatic drop in total gasoline inventories due in part to
the transition from Methyl Tertiary Butyl Ether (MTBE) reformulated
gasoline (RFG) to ethanol RFG. Another factor contributing to this
drop is related to terminals getting rid of their winter-grade
gasoline to make room for the summer-grade gasoline.
Past energy crises have
demonstrated that oil is traded in a world market, in which
events in remote areas affect the price of crude for almost
everyone. In recent years, these events included:
- Decisions by the Organization
of Petroleum Exporting Countries (OPEC) cartel, after
having reduced production quotas in 2002, to raise them
only slowly and reluctantly;
- Unexpected demand
growth in China and India;
- Disruptions in oil production
in major exporters, including Venezuela, Iraq and
Nigeria;
- Decline in the value of the U.S.
dollar, the currency in which oil is traded in the world
market, compared to other major currencies, particularly
the Euro;
- Uncertainty and fear of major
disruptions in Iraq and Saudi Arabia, in the context of
the war in Iraq and the threat of
terrorism. |
Just as a number of
factors led to increased crude prices, a combination of
features in the U.S. refinery industry contributed to an
increase in gasoline prices.
- U.S.
demand for gasoline has increased as economic growth has
resumed.
- Domestic refining capacity has
declined, both in number of refineries and in total
capacity.
- The structure of the refining
industry has changed. In 1981 most refining capacity was
owned and operated by integrated oil companies that
supplied their own crude oil, refined it, distributed
it, and marketed the products. Refining was only one
part of the company's profit-making operation, and
frequently was not an important profit maker. Now the
refining industry is characterized more by independently
owned, nonintegrated firms. When refineries are the sole
source of revenue to the owners, it becomes more
important that the operation be profitable, leading to
pressure to raise prices.
- The refining industry
has been operating with lower inventories of both crude
oil and gasoline, as a means of cutting costs. The side
effect has been reduced ability to meet unanticipated
demand, leading to greater price pressure.
-
Gasoline markets are fragmented regionally because air
quality requirements have led to numerous different
formulations to meet varying standards. In meeting
demand for these regional formulations, called "boutique
fuels," refiners lose flexibility to meet local
variations in demand elsewhere, leading to increased
price
pressure.
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What national factors impact gas
prices? Causes of Overall Gasoline Price
Fluctuations
Several outside forces influence
the price of gasoline. These include time of year,
environmental standards, and domestic or world
events.
- Gas prices
will go up during the summer and holiday seasons. Nice
weather and vacations increase the American summer gas
demand by 5% compared to the rest of the year. This
results in higher gas prices before and during the
summer season.
- Crude oil prices are
determined by worldwide supply and demand, with
significant influence by the Oil Producing and Exporting
Countries (OPEC) as they determine how much oil to
produce and sell to other nations. The more crude oil
OPEC elects to produce or release, generally the lower
the price. OPEC holds 2/3 of the world’s estimated crude
oil reserves.
- Worldwide demand for oil
has sky-rocketed, causing the competition for the
existing oil to increase its price.
- The United States is
currently experiencing a shortage in oil refineries.
Without the necessary number of refineries the oil
cannot be transformed into gasoline fast enough to meet
the demand of the American people.
- Fears of a terrorist attack
crippling the market have driven oil prices up as much
as 15 dollars a barrel.
- Domestic instability within
oil exporting nations will also lead to jumps in gas
prices. The possibility of major disruptions in the oil
market will cause the price of crude oil to
increase. |
For additional
information: Energy
Information Agency's Primer on Gas Prices
Why is gas so high in my area? Causes
of Regional Gas Price Fluctuations
There are
several reasons why there is fluctuation in regional gas
prices. These include:
- Americans
living farther from the Gulf Coast (the source of half
of the gasoline produced in the US) tend to have higher
gas prices because the cost to transport gas from the
refinery affects the price at the pump.
- Like any product, gas
prices are influenced by competition. Consumers in
remote locations face a trade off between higher local
prices and driving to an area with competitive lower
priced alternatives.
- Some areas of the country
have stricter environmental programs targeted at
reducing air pollution. These programs require
reformulated gasoline and restrictions on transportation
and storage, leading to an increased pump
price. |
Where does my money go at the
pump? Gasoline Price Components
- The cost of
crude oil is the largest factor in determining gasoline
prices. 55 percent of the price of gasoline is
reflective of the cost of crude oil. Local gasoline
prices take about seven weeks to reflect changes in
crude oil prices.
- The cost to refine oil and
the process to transform crude oil into gasoline make up
22 percent of the total cost of gas.
- Local, state and federal
taxes are levied on gasoline, accounting for 19 percent
of the total cost.
- Gas prices fluctuate based
on where you live, taking into account the distance from
ports and the difficulty of transporting gas to certain
locations. Costs incurred by gasoline company’s
advertising campaigns are passed onto you, the consumer,
and account for approximately 4 percent of the total
cost of gasoline.
Source:
Energy Information Administration |
How do
I know I’m not being ripped off? Avoiding Price
Gauging
Most experts agree that
it is difficult for a consumer to make a definitive judgment
as to whether they are the victim of price
gauging.
Gouging is distinct, by definition, from
price fixing, which is the collusion of multiple gas stations
to set prices. Gouging is the act of an individual station
taking advantage of supply problems (and even perceived supply
problems). The actual definition is determined by state
governments, who define what taking 'unfair advantage' of a
crisis is. Attorneys General monitor these situations
closely.
If you see prices at a station that far exceed
your regional average, that's when to take note, save your
receipt, and get in touch with the Virginia Attorney General's
office at (804)786-2071. You should also take down the prices
of all the varieties of gasoline available at the station,
from regular to high grade.
AAA offers the Daily Fuel Gauge Report which
allows consumers to see both national and regional averages
for gas prices.
Where can I go for more
information? Useful Links &
Websites
• Energy Information
Administration • United States
Department of Energy
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