10 things you should know about gas prices
If you believe the experts, the oil companies aren't lying to you; it really is supply and demand. And no, it isn't price gouging by any legal definition; it's just the normal profit taking.
1. Are gas prices truly high, and will they stay that way?
Gas prices have dipped slightly since hitting a record national average high of $3.227 on May 24. When adjusted for inflation, the 1981 price was a bit higher, at $3.29, according to the Energy Information Administration, an independent research arm of the U.S. Department of Energy. Factor in gains in average fuel efficiency -- 21 mpg today compared with 15 mpg to 16 mpg in 1981 -- and we're spending less on gasoline today: less than 3% of gross domestic product compared with 4.6% in 1981.
As U.S. refineries regain operating capacity in the days to come, the domestic supply should improve and cause prices to level off. Any disruption in operations -- from a hurricane or fire, for example -- could cause another bottleneck, however. And analysts don't expect any significant price drop until refinery capacity is added, in 2009 at the earliest.
"We would expect prices to be somewhere between $2.50 and $3.25 for the next several months," said Doug MacIntyre, a senior oil market analyst with the EIA. "Right now it's not in our forecast to see a return close to $2 a gallon anytime soon."
2. Is there something consumers can do now to immediately drive prices down?
On this one the experts generally agree: No.
One-day or one-month boycotts don't reduce the overall demand for gas and so don't affect price. (Economist Steven D. Levitt, author of "Freakonomics," called the recurring one-day boycott idea "a new low in economic thinking.")
As with weight loss, there is no quick fix, and the only answer is predictably not sexy: Consume less. Choose fuel efficiency, car pools, public transportation, your legs. With time, an across-the-board, consistent drop in demand should equilibrate prices.
An increasing number of retailers are offering separate prices for cash and credit. With a 2.5% credit card fee, stations are now paying upward of 8 cents a gallon to the card companies. Customers can't get a cash discount just for asking; stations must have both prices displayed and have their pumps configured to tabulate each.
Lobbying for a release from the nation's billion-gallon Strategic Petroleum Reserve wouldn't do much good; the current crunch is largely a problem of refinery capacity rather than raw supply.
Drivers can also use a fuel-cost calculator and MSN Autos' cheap-gas finder to plan ahead or use MSN Autos' fuel-saving tips.
Consumers who suspect price abuse can file a Web report with the Department of Energy or call the hot line at 1-800-244-3301.
3. If there's a gas "shortage," why can I buy all I want?
In the 1970s, when the government tried to allocate gas to keep prices down, miscalculations did result in shortages in some areas. There isn't a shortage now, say economists, because the free market is allocating supplies based on people's willingness to pay.
"There's an imbalance, and the imbalance is being taken care of through high prices," said Lou Pugliaresi, president of the Energy Policy Research Foundation, an independent research board funded in part by the oil industry. "The market will equilibrate."
That means poor people cut back and rich people pay more. The upside is that if the market is working properly, high prices should entice operators to boost supplies, causing prices to drop back down.
"Given these high prices, every incentive is on," Pugliaresi said. "It may take a few months, but that supply is coming."
Video: The great gas-price nonconspiracy
4. Why don't oil companies just build more refineries?
It takes 10 to 15 years for a company to site, permit and build a new refinery. With relatively flat profit margins prior to 2002 and calls to reduce the use of fossil fuels, analysts say the payoff has been too uncertain to risk a long-term, multibillion-dollar investment.
As a result, no new refineries have been built since 1976. When operating capacity drops from 95% to 89%, as it did to accommodate maintenance shutdowns and other problems this spring, producers are forced to buy refined product at world auction.
"You've got conflicting signals from policy makers," said Bill Holbrook, spokesman for the National Petrochemical & Refiners Association. "On the one hand, they call on industry to expand capacity. On the other hand, the same policy makers are advocating the reduction in the use of gasoline. So if you're a manufacturer, you're going to stop and think about how much to invest in a new factory to build a product that some are calling to limit in distribution."
Holbrook said the industry has built the equivalent of one large-scale refinery in each of the past 14 years in the form of expansions, and that "basically every major company is contemplating an expansion at a facility somewhere."
5. Do oil companies make greater profits during high-priced "shortages"? If so, what would motivate them to satisfy demand?
"Does it translate to profit? At this moment, yes," said Doug Reynolds, associate professor of oil and energy economics at the University of Alaska Fairbanks. "But, as with any company, it never lasts long. It always entices new competitors."
If the market is working properly, high profits do motivate new suppliers to enter the game, "as opposed to giving the profits to the people waiting in a gas line, who won't build new refineries," Reynolds said.
The question, he said, is why suppliers have not yet been motivated to build new refineries, in which case we need to look at the broader market conditions.
6. Are oil companies price gouging? What is price gouging, anyway?
Price gouging is when companies take advantage of consumers by charging an unjustifiably excessive amount during unusual market conditions. It is often associated with emergencies, when supplies have been choked off.
There are no federal statutes barring price gouging. Antitrust statutes make it illegal only when companies collude to keep prices artificially high. Some states have laws against price gouging, and a few examples of gasoline price gouging were found in the aftermath of Hurricane Katrina.
U.S. Rep. Bart Stupak, D-Mich., introduced legislation to make price gouging in the oil business illegal, then narrowed it before passage last month to apply only during a federal emergency, such as a natural disaster. It would not apply to the current situation.
"The sentiment behind that question is, are prices at a fair level?" said the EIA's MacIntyre. "And there are many answers to that."
7. Why does gasoline cost more in some areas than in others?
Tom Kloza, of the Oil Price Information Service, writes that analyzing "average" national gasoline prices is like assessing the average temperature of the "old man with one leg in an ice bucket and one leg in a bucket of hot coals." The price can top $4 in north Chicago and be $2.80 in rural Texas.
Factors that contribute to regional price differences include distribution costs (the distance from the refinery); state and local taxes; unique fuel specifications, such as those required in California; and the kind of cost-of-living variations that influence every market -- rents, property taxes and economic vitality. Wholesalers also engage in zone pricing, charging more for gas in places where retailers are able to fetch more from customers.
Within a region, pump prices vary for the same reasons the price of apples do: different supplier contract agreements; delivery volumes and frequencies; retail locations; and competitive activity. Owners differ in how much risk they're willing to take or how they can compensate. For example, some gas stations barely break even on gas in order to lure customers inside for soda and food.
For more, see this EIA primer.
8. Why do gas stations raise their prices when they still have the lower-priced gasoline in their tanks?
In every market, the cost of an item is the amount needed to replace that item, the "replacement cost."
Retail stations make very little profit on gasoline sales -- an average of 2 to 3 cents per gallon at convenience stores, which sell 80% of the nation's gas. They make less when prices rise, sometimes even losing money, and play a dicey game of chicken to compete for customers.
Gas stations do make money when lower-priced gasoline is left in their tanks. But they lose money when higher-priced gasoline is in the tanks as prices outside drop. With a check to the distributor for 10,000 gallons of product about to clear, they can't wait for the market to improve.
"The thing is, that gas will sit in the ground until we get more competitive," said Ren Gladu, owner of Ren's Mobile Service in Amherst, Mass. "It's dead money. . . . We want to sell that gas as quick as we can."
In the end, it's a wash, said Jeff Lenard, spokesman for the National Association of Convenience Stores. "When prices are going up, people are hanging out of trees with binoculars," he said. "But you generally don't get unsolicited hugs for dropping prices without a shipment."
Video: The great gas-price non-conspiracy
9. Gas is $3.50 a gallon in many places. Surely we're cutting back by now. Are Americans, in fact, buying more gas than a year ago?
Gasoline demand for the four-week period ending May 18 was up 1.2% over the same four-week period one year ago, according to the Energy Information Administration.
That doesn't necessarily mean that individual drivers, particularly in regions with high gas prices, are driving more.
The average demand growth is 1.5% to 2% a year, attributable to the fact that there are more people and more drivers. There are also more people working, meaning more people who can afford to drive.
"There is a demand response to prices, it's just not a large one," the EIA's MacIntyre said. "What we do know is that at $3 a gallon we do start to see demand growth slowing."
10. Can the government really do anything about gas prices?
The free market generally responds more quickly than government controls to equilibrate prices. The government does have a role, however, in ensuring that a free, robust and legal open market exists. The Federal Trade Commission investigates allegations of abuse.
Tyson Slocum, director of the Energy Program at the Public Citizen, a consumer advocacy group, says today's domestic oil market is not adequately competitive.
A flurry of mergers in 1990s have restricted the market, allowing a handful of oil companies to make record profits without any pressure to reinvest in refineries, Slocum said. The companies are "swimming in profits," while captive drivers are left without any alternatives but to pay higher prices.
"Unless people have easy access to alternatives, they're just going to suck it up," he said.
The government could help consumers by imposing a tax on windfall profits, revoking federal subsidies to oil companies and re-regulating energy trading markets, he said,
"We're not talking about the production of yachts or diamonds," Slocum said. "We're talking about a commodity that is literally a fuel for our entire economy. To say that the government should not do anything to regulate this is suicide."
Permanent Link to this Blog Post: