Why You’re Paying More at the Gas Station

Gas prices in New York have risen to $3.74 in April from $3.08 per gallon last December, which means that if your car has a 15-gallon tank, you are paying about $12 more at the station—money we all can afford to save.

Many factors near and far affect gas prices, including conflict in the Middle East, the rising demand from developing countries like China, taxes, environmental issues and even the weather.

The rise in the price of gas has been attributed to conflict in the Middle East, the global economic recovery or simply declining supply of nonrenewable fuel. But how can these global movements affect how much you pay at your local gas station?

The price of crude oil makes up about 60 percent of gas prices. The conflict in the Middle East, a region that produces almost half of the world’s oil, has destabilized crude oil prices, which increased to $107.94 from $87.79 in December.

Libyan production alone has decreased by about 1.5 million barrels of oil each day. As Economics 101 goes, when there is decreased supply and stable demand, prices go up.

Yet the market trades not just on current supply but also on future projections, said Neil Gamson, energy prices expert at the U.S. Energy Information Administration. “There is a lot of uncertainty in the market right now about how long the conflict will continue and how it will disrupt the flow of oil,” he said.

While most countries, including the U.S., have oil reserves to buffer the effect of brief supply disruptions, energy traders still drive crude oil prices up to counter the possibility of future shortages. It becomes a self-fulfilling prophecy: traders mark the price higher in anticipation that it will rise, therefore raising it.

Some traders may also use the conflict as a reason to raise prices and increase their profits from oil producers elsewhere, such as in Russia or the U.S. Critics claim that crude oil prices should not rise so much in response to such a slight decrease in supply, so they blame profiteering traders when the oil market is known to be mercurial.

Traders can’t maintain artificially raised prices, said John Felmy, chief economist of the American Petroleum Institute. “The oil market is very inflexible, it’s very tight. So what that means is that the smallest supply disruptions will send the prices shooting up—and there really are supply disruptions.”

Aside from decreased supply, increased demand can also push prices up. This is happening against the background of the global economic recovery and the rapid growth of emerging economies like China, India and Brazil.

“Increased oil consumption is a good sign, because oil is the fuel for economic activity. Putting it simply, more oil consumption, more economic activity, “ said Jan Stuart, global oil economist at Macquarie Group. “We are seeing this in many developing countries, like China obviously, and to a certain extent, the U.S.”

American demand for oil decreased slightly in the great recession from 20.7 million barrels per day in 2007 to 18.7 million in 2009, before steadily increasing again as the economy recovered On the other hand, Chinese demand for oil has been rapidly increasing from 7.6 million barrels in 2007 to 9.2 million in 2010. The same pattern can be seen in Brazil and India.

“We don’t see any sign of this tapering off anytime soon, so the price of oil will continue to climb in the long term,” said Stuart.

Felmy concurred. “It’s always dangerous to try and forecast the price of oil. All things being equal, which they never are, I think demand for oil in developing countries will continue to grow, and if so, prices will keep going up,” he said.

While increased demand for oil in the U.S. means that the economy is recovering, high crude oil prices may stymie growth by cutting into the wallets of consumers and businesses. If you need to spend more money to pay for gas, you will have less to spend on other goods and less to invest on new ventures.

Spiking oil prices also cut into the national GDP. The International Monetary Fund predicts that every $10 increase in the price of oil per barrel will cut the current GDP forecast of 3 percent by 0.5 points.

Aside from the rising price of crude oil, a few minor factors also help push gas prices up. The EPA mandates that ethanol must make up at least 10 percent of gas sold in New York, so gas prices rise together with increasing prices of corn from which ethanol is distilled. Rising credit card costs and rising sales taxes also contributed to that larger bill you pay at the gas station.

Gas prices also fluctuate seasonally. As the weather gets warmer, people tend to drive more. A more expensive type of gas is also used for the warmer seasons because less of it will evaporate in the heat. “It’s a seasonal pattern, so prices will rise slightly in summer and decrease slightly in cooler seasons, providing that no extraordinary events play out,” said Gamson.

All in all, economists concurred that in both short-term and long-term projections, gas prices will continue to rise, even if the conflict in Libya is magically resolved tomorrow.

“When you have such widespread disruptions and fields going offline, it will take a long time to recover,” said Gamson. “So you will see the recovery play out in the course of a few months. Meanwhile, China guzzles more oil and prices will still rise.”

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