Guest Blargued By: Zach

On my way to work today I filled up at my local 76 station. What could have possibly intrigued and outraged me at the same time other than licorice flavored liquor? My beloved 87 octane gasoline topping the charts at $3.97/gallon. As I stood there pumping my gas and eating my Abba-Zaba, I wondered how much higher these prices would go. But wait I thought, why are gas prices rising in the first place? And why the F@*& are they so high to begin with? “Good questions Zach” I told myself, “but wait, I don’t even really know the answers.” I set out on a quest to find out and to put a face on this travesty as to have someone or something in which to direct my disgust and anger.

What I found was no clear-cut answer or mathematical formula. No black and white newspaper to completely satisfy me. Not even an individual for me to direct my expletives at. All qualms aside, these “revelations” reinforced on me the vast complexity of the situation. There is no one thing that can be done as to control our gasoline prices, or an easy button to push that will change the situation. The reason you pay $3.97 at a gas station in Truckee CA, is a product of social, economical and political factors spanning continents and timelines. But hey, did you really think it was going to be that cut and dry?

First, I think it is appropriate to talk a little bit about inflation. Although most readers are familiar with this economic principle, it is important to get us thinking about it. In·fla·tion –noun 1. Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency. Now we hear people say all the time “I remember when gas was a nickel back in blah blah blah.” Yes, this might have been true, but our nation’s currency and the value of the U.S. dollar are not that simple. While gas might have cost a nickel a gallon in 1940, Average Joe might have only made a nickel a day working at that very fuel station. From 1913 to 2007 the average annual U.S. inflation rate was around 3.42%.

Now as I remember, in 1990 when I first received my drivers license, gas was around $1.10/gallon. California says her average was $1.42/gallon and I believe her, so we will use that for our calculations. Taking inflation into account, $1.42 in 1990 is equivalent to roughly $2.37. Gas prices are higher than that today, so there must be other factors involved. However, next time you hear Grandpa Time telling you gas was a nickel back in his day, let him know a nickel back then is worth about a dollar nowadays. So inflation doesn’t fully explain the current gas prices and needless to say I am shocked. Let’s continue by diving into laws affecting gasoline and the taxes and markups imposed upon it.

Below is a handy little chart shaped like a cute little gasoline pump to visually show taxes and markups on gasoline:

You might be saying “ummm, alright well I understand the costs of refining, distribution, some profit here and there and taxes, but wait; what about those evil, crude-oil producers the liberal FOX media has told me so much about?” I assume the liberal media is referring to OPEC, the Organization of the Petroleum Exporting Countries. Although the OPEC does set crude oil prices and thus have an effect on how much the consumer pays, one would argue that they are not as much to blame as media outlets make them out to be. Taxes and California legislature are the biggest differentiators in gas prices from state to state. In 1999 California passed a law to discontinue use of gasoline containing MTBE by 2003. MTBE (methyl tert butyl ether) is an oxygen-bearing additive used to reduce engine knocking and help gasoline burn more cleanly. Approved for use in 1978 and widely used in the 1990s it quickly became a staple used by refineries to comply with cleaner-burning-fuel laws. Since 2003 refineries which supply to California do not use MTBE and instead have reformulated their gasoline, thus raising the prices. In addition to stricter laws to preserve our environment, Californians pay a 20 percent sales tax, an 18.4-cent-per-gallon federal excise tax and an 18-cent-per-gallon state excise tax. California’s distance from the refineries located near the Gulf of Mexico can also add to the cost of gasoline if it chooses to obtain gas supplies from those refineries. Now back to OPEC.

OPEC is a consortium of 12 countries: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Together, these 12 nations are responsible for 40% of the world’s oil production and hold two-thirds of the world’s oil reserves, according to the Energy Information Administration (EIA). When OPEC wants to raise the price of crude oil, it simply reduces production. This causes gasoline prices to jump because of the short supply, but also because of the possibility of future reductions. When oil production dips, gas companies get nervous. The mere threat of oil reductions can raise gas prices. A few other countries contribute to the world’s crude oil supply including Mexico, United States and Canada. OPEC monitors their oil supplies and adjusts accordingly to hold their desired price. Now a key predictor for OPEC pricing recently has been the unrest in the East. Traders of oil futures fix the price per barrel based on their expectations of political stability, especially in the world’s largest oil-producing nations. And they don’t like what they see in Iraq. Red Cavaney, president of the industry trade group ‘American Petroleum Institute’ recently commented on this situation. According to Cavaney, “…as soon as you can stabilize the civil situation, they [OPEC] will significantly be able to ramp up production.” Now political unrest can occur with or without the help of Mother America and also can occur without war. It is also not the sole predictor of crude oil prices. What you pay at the pump does have some relationship with crude oil prices, but they are not necessarily directly proportional. For example, while crude oil prices increased roughly 150% from 2003-2008, average United States gasoline prices only rose 52% (prices adjusted for inflation). So while crude oil prices, taxes and tariffs are not directly proportional to the price at the pump, what is? Well as we have seen, nothing by itself.

How do we stand in the grand scheme of crude oil importation and exportation you may ask? Well, the U.S. produces roughly 5,102 barrels per day (bpd), but consumes 20,687bpd! This puts the U.S.’s net exports/imports at -12,356bpd, meaning we are importing far more oil than we are exporting. Furthermore, in 2007 the U.S. imported 1.5 times as much crude oil from OPEC than from non-OPEC countries. As we have learned, gasoline prices in California and the United States are a product of many factors, some of which are taxes, production costs, etc, and some of which are related to crude oil prices set by exporting countries. While the U.S. produces far less oil than it consumes, and imports primarily from countries within OPEC, it doesn’t seem likely that gas prices will drop dramatically in the short run. On the upside, in 2007 the U.S. Senate passed its Budget Resolution, which included a provision for lease sales of the right to drill for oil in region of the Arctic National Wildlife Refuge (ANWR) in Alaska. Let’s keep our fingers crossed and maybe we will see huge oil reserves uncovered. More realistically though, we as Americans need to look at alternative fuel sources, not just to save money, but also to insure that we will not be harvesting all the oil this planet has to offer. Alternative fuel sources such as hydrogen fuel cells, electric vehicles and hybrids use little or no gasoline and are low on emissions which can help keep our environment in tact for the long haul. Although “Going Green” is not the topic of this article, it is something worth looking into.

What you have experienced, is merely a short detour into the web of factors that determine and predict gas prices. Of course this is not a comprehensive, in-depth analysis, but instead a broad generalization into main factors that determine how much Californians pay at the pump and hopefully an outline to give you and something to think about. Or, at least enough ammunition to combat a drunken truck driver at the bar when he starts explaining how illegal immigrants from Mexico are raising gas prices through carpooling. Lastly here is some food for thought if you think we have it bad here in California.

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