For Motorists, gas price jump’s a shock: They had expected Midwest woes to increase costs, but not so much so fast

Feb 23rd South Bend Tribune headline: For Motorists, gas price jump’s a shock: They had expected Midwest woes to increase costs, but not so much so fast

The chatter lately in the Michiana area seems to be whether or not people would rather give up an arm or a leg based on gas prices which have rapidly increased in the area.

The South Bend Tribune ran an article in the February 23^rd newspaper which reflected that prices had jumped within hours from $3.09 to $3.36 at a 7-Eleven on Mayflower Road in South Bend. While the article had comments about the frustration of local residents due to gasoline prices and quotes about how it will change the lives of those interviewed, it didn’t really explain much about the prices.

The Tribune allows readers to comment on certain articles that are published and many people chimed in on this topic. Many of which led me to the points I am going to blog about today.

The comments left by readers led me to question the following: How are gas prices determined? What causes such fluctuations in prices? And finally, is there a solution that will allow this to end?

According to the United States Department of Energy, gas prices are determined by the following: taxes, distribution and marketing, refining and crude oil.  Based on a price of $2.99 in December 2010, The Department of Energy stated that approximately 24% of the price was taxes, 8% was transportation and marketing, 10% was refining and 68% was crude oil price.

The only formula not included in this breakdown, is the amount of up-charge the station tacks on for its own survival.  While some states monitor and cap this amount, many states don’t. As we all have figured out, consumers tend to control this by choosing to avoid the stations which cost more than the others.

While all of these items determine the price of gasoline, the percent of taxes each state charges has a heavy influence on the amount charged. For example, if Indiana charges approximately 24% of each dollar of gasoline for taxes and Alabama only charges 11%, obviously the price of gasoline is going to be cheaper than Indiana.

The price of crude oil, because of the grades of oil, also has a strong influence on the prices of gasoline.  A large portion of oil is controlled by OPEC (Organization of Petroleum Exporting Countries) made up of 13 nations who are responsible for about 40% of the world’s oil production.

To give you an idea of the scope of what Americans use, in July 2008, the United States imported about 13 million barrels of crude oil per day.

But OPEC is not the only source the United States uses for oil, we import from both Canada and Mexico, and in 2010 the United States was operating 148 refineries in our own country.

To date, the United States is the third largest producer of oil.

So who is to blame for the recent increased gas prices? After all, the crude oil they are drilling now hasn’t been refined and has nothing to do with the political unrest in Egypt, or does it?

Historically, weather and wars are responsible for large increases in prices at the pump. Recently, crude oil has increased to well over $100 per barrel due to unrest in Egypt. But is Egypt a large course of crude oil? No, Egypt is such a minute supplier their oil doesn’t really matter, but many fear that the large amount of barrels that pass through the Suez Canal and Sumed Pipeline are going to be threatened.

So, if the unrest in Egypt ended today, would prices at the pump magically return to $2.00 per gallon? It is possible that they will return to a less obnoxious price than we see today, but the end isn’t anywhere near. Hurricanes, snow storms and tornadoes repeatedly threaten the Southern refineries in the U.S., and make transporting products harder from refineries to states far away.

In addition, places like China and India are producing more miles of highway than they’ve ever had before.  Their middle class, largest ever, is producing more drivers than ever before, increasing demand for products.  Their increased demand is sure to affect our prices based on the supply produced by OPEC.

Many of the comments in the newspaper encouraged drivers to boycott BP. But the price of gasoline really isn’t dictated by BP, so by boycotting local BP stations, you are really only hurting the owners and workers from your community.

Other readers stated that each day they would encourage fellow readers to boycott another gas station, so they’ll have additional supply and will be forced to reduce the price. That line of thinking isn’t going to solve anything.

Believe me, I’m not happy about the huge hike at the pumps. I’m also not happy that the largest oil company, Exxon Mobile, posted a 9.25 billion profit for the fourth quarter, a 53% soar and largest profit in two years.

Slightly behind Exxon, was Chevron, the second largest oil company, with a 72% increase in the 4^th quarter.  Finally, slating a 46% rise in the third quarter, was ConocoPhillips.

While these companies have to pay taxes on their earnings, it seems as though the government should hold them more responsible for gouging the consumer. 

Stimulus seems to be a large concern of the government.  Possibly the answer for stimulus is allowing regular consumers to have money in their pockets, instead of forking it over to the billions of dollars sustaining the oil companies.

I hoped that by understanding the process of how prices were determined, that I would feel better about the huge leap in prices at the pump, but I don’t.

I have a better grasp for why prices vary from state to state, but I don’t really think there is a good answer for a change.  If we rally against the amount of taxes that are collected at the pump, legislators will only tax us on something else to make up for the difference.

Competition between local stations tends to keep them in check as far as tacking on a little extra of their profit status. So I think that is good.

Finally, I was impressed that the United States is the third largest crude oil producer and that we have 148 refineries.  At least we are trying to accomplish something .  I just hope we don’t wait too long to increase production with the competition of demand from other countries becoming greater.

I guess for now, I’ll have to consider giving my arm for the price of gas. At the rate things are going, I might need my leg!