Stuff You Should Know: High Gas Prices

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If you own a vehicle, you don’t need us to tell you that gas prices are once again reaching “screw it, I’m just going to walk to work” levels. Depending on where you live, gas is either nearing $4.00 per gallon or already well above it. What the hell is going on? Didn’t electing Obama mean cushy jobs and one dollar per gallon gas for all? And where the hell are our flying cars?

Sorry, we got a bit off track there. Anyway, rising gas prices are an especially difficult problem to explain. It’s fun to blame it all on misguided wars in the Middle East and oil company greed, but that’s not only just scratching the surface, it’s also not as big of an issue as you probably think.

Here are ten things you should know about high gas prices…

1. What Exactly Are We Paying For?


Much like a Miley Cyrus CD isn’t $18.99 because that’s what it costs her to record those shitty songs, gas prices aren’t based on just one factor. In fact, it’s impossible to know how many components make up the price of gas.

Just joking, there are four. This data is isn’t specific to prices in 2011, but it’s still a pretty good breakdown of what you’re paying for when you spend $250 to fill the tank in your Candy Apple Red Grand Caravan (also, it’s a pretty picture instead of stupid words, we know what the internet likes):


As you can see, there are a few different factors that play into setting the price of gas. Among them, none is more important than crude oil. But let’s talk about something else first…

2. Who Wants an Oil Refinery In Their Backyard?


Generally, the answer to this question in the United States is “nobody.” Unfortunately for us, until we can come up with some other way to power our tricked out Kias and such, a lack of much needed oil refineries will doom us to high gas prices no matter what the crude oil market looks like.

We can drill Alaska all we want and invest billions of dollars in fracking (click the link if you want to know what that is, we don’t have nearly enough space here to explain it), but if we don’t have enough refineries to turn the resulting oil into sweet, delicious gasoline, it won’t do us a whole lot of good. And on the list of things most Americans want erected in their backyards, oil refineries rank somewhere between nuclear power plants and halfway houses for pedophiles.

It’s a problem that’s only made worse by the fact that oil refineries are a popular target for attacks in Iraq. In fact, the story we linked to just now is about an attack that happened over the weekend in Iraq against the country’s largest oil refinery. Say what you will about Iraqis, but those crafty bastards sure know how to make it difficult for us to pilfer their oil.

But enough about that. Let’s talk crude oil, black gold, Texas tea…

3. Crude Oil Prices: A Matter of Supply and Demand


As that breakdown in the previous entry shows, crude oil prices account for 50% or more of the total cost of gas. The demand for crude oil isn’t going to slow down anytime soon thanks to explosive growth in countries like China and India, not to mention our ongoing love affair with Escalades and Hummers.

What gets us into trouble at the pump is supply. Unrest in oil producing regions often leads to a decrease in oil supply. When supplies are low and demand is high, prices skyrocket.

4. Ha! So it IS All that Unrest in the Middle East That’s Screwing Us Right Now!


If only it was that easy to explain. As far as oil producing nations go, Egypt barely has any oil and Libya doesn’t even crack the top 10. So we can’t really place the blame there. And that’s before you take into account where we get our oil from. It’s a popular misconception that most of the oil in the US comes from the Middle East. But take a look at the top four countries that supply us with oil:

  1. Canada
  2. Mexico
  3. Saudi Arabia
  4. Venezuela

Only one Middle Eastern country makes the list, and so far, the hip trend of overthrowing Middle East dictatorships by way of Twitter has yet to catch on in Saudi Arabia. And if it does, don’t expect us to just sit there while it happens. But that’s an article for another day.

While it’s true that Venezuela and Mexico are both experiencing a bit of turmoil right now, it’s not enough to explain why prices are as out of control as they are now. Canada certainly isn’t in the throes of any major unrest. They haven’t had a national crisis since Wayne Gretzky was traded to the Los Angeles Kings for fuck’s sake.

5. So It’s the Oil Companies Then, Right?


Not really. Oil companies certainly aren’t innocent in all this. The environmental carnage they set loose in the Gulf of Mexico definitely didn’t help our cause much, especially once B-Rock put the clamps on drilling in the Gulf (so much for that oil from Mexico).

But as much as the stories of record oil company profits may indicate otherwise, they don’t actually set oil prices. If they did, you can bet your ass that oil prices wouldn’t have dropped to less than $10 per barrel in 1998. Oil company profits work a lot like farming industry profits. If it costs a farmer $1.00 to produce a bushel of corn and the market price is $1.50 per bushel, that farmer makes 50 cents profit. If the market price jumps to $2.00, his cost to produce doesn’t necessarily jump, but his profits certainly do.

It’s the same way with oil companies. They aren’t the cause of high oil prices, just the happy beneficiaries.

6. OPEC?


OPEC (Organization of the Petroleum Exporting Countries) is another famous target of gas price outrage, but they don’t really have much say in oil prices. Supply, though, is another story. They dictate how much oil member countries can produce, which does have some sway in keeping prices higher than they would be if the market was a little more competitive, but even that power isn’t as vast as it used to be.

Thanks to unprecedented worldwide demand for oil, pretty much all of the member countries are producing as much oil as they possibly can. Saudi Arabia is the lone exception to that rule, you know, because they’re our friends. We guess.

7. We Got It! It’s the Market, Right?


Boom! You got it! Oil prices are mostly determined by the world market. Refinery shortages, unrest in oil producing markets, demand… all of that influences the market price for oil. When supplies dip and demand is high, prices go up. In the unlikely event that demand somehow drops, prices will drop. But that’s not happening anytime soon.

But let’s save that supply question for later, because the way the world oil market works present the US with a special kind of challenge…

8. The World Market is Priced in Dollars


American dollars. Not Canadian dollars, yen, pesos, euros or any other wacky foreign currency. The oil market is priced in dollars. If you want to blame rising gas prices on just one reason, plummeting dollar values are a great demon to go with. It’s not an easy concept to explain, but we’ll do our best. But just in case, maybe read this in the highly likely event that we’re unable to capture all of the nuances properly. Anyway, here goes:

Basically, since the oil market is priced in dollars, a weaker dollar means countries with a stronger currency can buy the same amount of oil for less money. Let’s say a barrel of oil is priced at $100 dollars and current exchange rates mean you can buy $100 worth of oil for 70 euros. If the euro increases 10% in value against the American dollar, you can buy that same amount of oil with 63 euros. That means that countries with currency that is stronger than the currently lagging American dollar can buy more oil for less money. And they do. And that drives the demand for oil up. And that drives prices up. Because those oil prices are set in American dollars, we feel the pinch more than other countries with stronger currencies.

See? It’s a fucking circus to explain and that’s just the beginning. Like we said, read this for the full story. But you can summarize it as this… a weak American dollar often leads to higher gas prices.

9. So that Means We Get to Blame George Bush, Right?


Sure, provided you’re willing to completely overlook the fact that, under Obama, the dollar hasn’t improved much either. Truth be told, this is one of those cases where Fox News types howl about the media ignoring Obama’s hand in a problem and, though we shudder to say it, they totally have a point.

The last time gas prices were this out of hand, Bush was in office and the weak American dollar was the focus of most of the blame. Now, it’s 2011 and gas prices are outrageous again but pretty much everything except the American dollar is getting the blame. But it’s still the main issue.

Did Obama inherit some fiscal difficulties from the Bush administration? Of course he did. Has he done anything to make matters better? Not really. At least not yet, unfortunately. So, sorry Bush bashers, this is an issue that we all get to enjoy as one big, unified, four-dollar-per-gallon paying front. It’s only fair.

10. So What the Hell Do We Do?


Well, to hear Conservatives tell it, we just need to drill the shit out of Alaska and all is solved. And it will be… years and years and years from now. It’s not like we can just pull our SUV’s up to a pump in Anchorage tomorrow and magically have 75 cent gas.

Alternative energy is an option, but again, it’s not going to happen overnight. So, both sides have their solutions in mind, but neither really address the fact that your commute to work THIS WEEK is going to set you back approximately the same price as an iPod Nano or some shit.

In the meantime, all we can really do is replace that gas guzzler with a womanly Prius, walk instead of drive whenever possible and hope that all the various conflicts and situations around the world that are putting a strain on available crude oil supplies work themselves out and that the economy here in the US makes a dramatic turnaround.

Until then, we’re pretty much screwed. Hooray!