Capitol Monitor ....
Congressman J. Randy Forbes, Fourth District of Virginia 

May 4, 2006

HOME
CONTACT
UNSUBSCRIBE
SUBSCRIBE
PRIVACY

 

In this Issue

1. Gas Prices Primer

 

 

:: 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.


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

KEY ENERGY LINKS ....

Report Gas Gouging Online to Federal Government

Review Fuel Economy Tips from the Federal Trade Commission

Summer Travel ....

Making plans for travel this summer?

 The links below will provide you with valuable information to make your trip a success.

Applying for a U.S. Passport

Travel Tips and Advisories

ON THE HILL ....

Current Floor Proceedings

Bills Coming Up This Week

Monthly Whip Calendar

OFFICE LOCATIONS ....

307 Cannon House Office Building
Washington, DC 20515
202.225.6365

505 Independence Pkwy, Suite 104
Chesapeake, VA 23320
757.382.0080

2903 Boulevard, Suite B
Colonial Heights, VA 23834
804.526.4969

425 H. South Main Street
Emporia, VA 23847
434.634.5575

Please do not reply to this message. This e-mail address does not accept incoming messages. To send an email, please click here.