Who’s to blame for $4 gas

The next time you are at a hosed-robber – I mean the gas pump – do a gut check. The Energy Information Administration has the numbers that will make you sick long before the fumes will.

Who’s to blame for $4 gas

Prices have surged over the past four years – and there’s a bunch of reasons why.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — It’s hard to imagine now, but in 1999 gasoline sold for 90 cents a gallon. How’d we get from there to $4 a gallon?

There is no short answer – many things happened, and together they formed a chain of events from cheap gas to $100 tankfuls.

2004: Demand pressure

One of the most common reasons cited for the price jump is supply and demand – we are using more oil, which accounts for 70% of the price of gas, and finding less of it.

Why we are finding less oil and using more of it is partly a result of the low prices during the 1990s. Those low prices – partly caused by low gas taxes in the U.S. compared to other developed nations – both encouraged rapid consumption domestically (think SUVs) and underinvestment in new production by the world’s oil companies.

By the time 2004 rolled around – and developing economies around the globe roared to life – the world was left in a pinch.

“Our demand has skyrocketed, but our ability to supply that demand has stagnated,” said Stephen Schork, publisher of the industry newsletter The Schork Report. Gasoline prices topped $2 a gallon for the first time ever in May of 2004, “and we’ve been off to the races since then,” said Schork.

As demand grew and the supply of oil remained relatively flat, the difference between the amount of oil the world could produce and the amount it consumed narrowed. That meant a supply disruption from one place in the world could not be easily covered with spare oil from another part.

2005: The storm

This was illustrated in September 2005, when Hurricane Katrina knocked out a significant chunk of U.S. refining and gasoline prices spiked above $3 a gallon for the first time ever.

“It exposed how little surplus refining capacity we have in the U.S.,” said James Crandell, an energy analyst at Lehman Brothers.

A new refinery hasn’t been built in the United States in three decades, although capacity at existing refineries has been expanded.

2006: Hot tempers

The lack of spare supply has kept other geopolitical events in the forefront for the last few years. Iran and the spat over its nuclear program dominated the news in early 2006, and combined with Israel’s invasion of Lebanon in the summer of that year to cause another spike in gas prices to over $3 a gallon.

Geopolitical events need not be shooting wars to attract attention. Analysts say general resource nationalism since 2004 is partly responsible for high oil prices.

In the past few years, Iran’s Mahmoud Ahmadinejad, Russia’s Vladimir Putin and Venezuela’s Hugo Chavez have all become more bellicose on the world stage – in some cases, seeking a bigger share of the profit from foreign oil firms or threatening to cut off oil supplies if attacked.

Some say the Bush administration’s provocation of Iran and Venezuela, coupled with a botched occupation of oil-exporting Iraq, has contributed to the geopolitical tension. But defenders say that, in the long run, the administration’s actions will eventually lead to a more democratic – and thus stable – global supply.

2007: Tight supplies

New supplies of oil from non-OPEC countries were supposed to come online in 2007 and ease some of these supply bottlenecks. But problems in Kazakhstan and Russia – as well as sweeping drilling bans in the United States – mean global consumption is growing twice as fast as non-OPEC production.

Analysts say OPEC, which hold two-thirds of the world’s oil reserves but sees a global economy humming along despite $130 oil, has little incentive to increase production.

2008: Speculators swarm

Strong demand, tight supplies and a volatile marketplace have attracted the interest of investors – the last main contributor to high prices.

“The speculator has seized upon this opportunity,” said Schork. “They have recognized there is something fundamentally flawed in this market.”

Since 2003, the number of oil contracts exchanged on the NYMEX has more than doubled, said Schork.

Money flowing into oil – and commodities in general – has been especially sharp over the last 6 months as investors look for good returns amid falling stock prices and an inflation hedge against a falling dollar.

That’s helped push oil prices to nearly $130 a barrel and gasoline to an average of nearly $3.80 a gallon – smashing previous records even when adjusting for inflation.

Why do you think gas prices are so high? Post a comment.

Whether this investor influx into the oil market is justified is matter of debate. Some see high oil prices as necessary to boost supply and limit demand.

“You can’t just point the finger at speculators,” Michael Haigh, head of U.S. commodities research at the investment bank Société Générale, recently told CNNMoney.com “Fundamentally, the markets are where they are supposed to be.”

Others are less certain.

“The fundamental picture to us doesn’t justify the price,” said Lehman’s Crandell. “It’s kind of suggestive of a bubble.”

Are you feeling the pinch of high gas prices? Tell us how gas prices are affecting you and what you’re doing to cope. Send us your photos and videos, or email us to share your story.

Why not stockpile gas?

Apparently I’m not the only one to think of the idea. If each person stockpiled gas – especially at a lower price – then, at some predetermined date, we all stop buying gas.

I realize the size of your stockpile would be big – proportional to size of your family and your “pain” tolerance to stop driving your gas-sucking SUV – but think of the possibilities.

A Sign of the Times

This cartoon is a sign of the times. It hit me yesterday when I spent $68 for about 17.5 gallons of gas! Then there’s this story, reprinted for 1 month by permission from AP.

AP IMPACT: What makes up the price of gas?

AP Business Writers

Consider the game of chicken that plays out every day across Pennsylvania State Highway 441. In Marietta, where the road hugs the Susquehanna River, a Rutter’s Farm Store gas station stands on one side, a Sheetz gas station on the other.

Kelly Bosley, who manages Rutter’s, doesn’t even have to look across the highway to know when Sheetz changes its price for a gallon of gas. When Sheetz raises prices, her own pumps are busy. When Sheetz lowers prices, she has not a car in sight.

She calls Rutter’s headquarters to report the competition’s new price and wait for instructions.

“I call a lot of times and say, ‘They went down, hurry up! Hurry up! Call me! Call me!’ Or it could be where theirs goes up, and I’ll say, ‘Take your time! You know, I like being busy.’ But I have no control over that.”

You think you feel helpless at the pump?

Bosley makes a living selling gas — and even she has little control over what it costs.

So how exactly are gas prices set? What determines the hair-pulling figure you see displayed in large electronic or plastic numbers?

It all starts with oil.

The biggest factor in the skyrocketing price of gasoline is the historic ascent of crude oil, which has surged from $45 per barrel in 2004 to more than $135 this past week.

In the first quarter of this year, based on a retail price of gas that now seems like a steal — $3.11 a gallon — crude oil accounted for all but about a dollar, or 70 percent, of the cost, according to the federal government.

The rest is a complex mix of factors, from the cost of turning oil into gas to taxes to marketing costs to, sometimes, nothing more than the competitive whims of your local gas station owner.

Not that understanding the breakdown makes it any less cringe-inducing to fill ‘er up.


The knee-jerk villains in all of this are the oil companies, fat with multibillion-dollar profits, frequent targets of populist anger. But wait: The oil companies don’t set the price of oil or the cost of a gallon of gas.

Prices are a function of the open market, the result of futures contracts being traded on the New York Mercantile Exchange, or Nymex, and other exchanges around the world.

Buying the current July crude oil futures contract means you’re buying oil that will be delivered by the end of July. But most investors who trade futures have no intention of ever accepting the underlying oil: Like stock investors who frequently buy and sell their holdings, they’re simply betting that prices will rise or fall.

Of late, on the Nymex, oil futures have been rising.

Why? Blame the falling dollar. Oil is priced in U.S. dollars, and the weaker the dollar gets, the more attractive dollar-denominated oil contracts are to foreign investors — or any investor looking for a safe haven in the turbulent stock market.

The rush of buyers keeps pushing oil futures to a series of new records, and the rest of the energy complex, including gasoline futures, has followed. That pushes up the price of gas that goes into your tank.

There is some evidence Americans are buying less gas as the price marches higher, and common sense suggests they would cut back even more if gas rose to $4.50 or $5 a gallon.

Lower demand should mean lower prices — but it takes time for that to happen, given the enormous scale of refining operations that produce gasoline.

“Once demand begins to slow, that needs to translate into inventories, then you get some price weakening,” said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. “But it takes a while.”

Oil and gasoline prices often move in the same direction, but they aren’t linked directly. In fact, while oil prices have more than doubled in the past year, gasoline is only up about 19 percent during the same time.

Oil prices often fluctuate with production decisions from the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s crude, or when conflict in the Middle East or Nigeria threatens supplies.

And the rise has only grown more dramatic. Oil sprinted higher this past week, rising more than $4 a barrel on Wednesday alone and past $135 on Thursday.

As for gasoline prices: They’re closely tied to demand from U.S. drivers and how efficiently refineries are operating. Falling production or inventories often send prices skyrocketing.

Those prices can vary greatly depending on the region.

The Gulf Coast is the source of about half the gasoline produced in the United States, and areas farthest from there tend to have higher prices because of the cost of shipping gas via pipeline and tanker truck all over the country.

Add higher taxes in places like California and New York that push the price higher.

Oil companies insist their earnings, measured against revenue, are in line with other industries. On top of that, rising oil prices have sharply cut profit margins for refining, and that hits the major oil companies — which both pump oil and refine it for use as gasoline.

A giant like Exxon Mobil can handle the blow. Its refining and marketing profits for the first quarter were down 39 percent from a year ago, but Exxon still banked a nearly $11 billion profit because of the hefty prices earned on crude it pumped out of the ground.

Smaller refiners aren’t so fortunate. Sunoco Inc.’s refining and supply business lost $123 million in the first quarter, hurt by lower margins. Tesoro Corp. lost $82 million for the same period.

In any case, huge profits at big oil companies like Exxon Mobil and Chevron aren’t because of high prices at the pump. Their massive profits are tied to their exploration and production arms, which are benefiting from record crude prices.

Higher crude costs also have squeezed profits at the refining arms of companies like ConocoPhillips, which don’t produce enough crude themselves to refine at full capacity without buying more oil from other producers.

Other costs are a factor — though they’ve remained relatively stable.

For example, federal and state taxes added 40 cents to a gallon of gas in the first three months of this year, roughly the same amount as they added four years ago.

California’s 63.9 cents of tax is the nation’s highest, Alaska’s 26.4 cents the lowest. How the money is used varies from state to state, though the federal take helps to build and maintain highways and bridges.

Marketing and distribution costs — the tab for delivering gasoline from refiner to retailer — were 27 cents to start the year, only 6 cents above the cost four years ago.

The cost of refining added 27 cents to a gallon in the first quarter of this year, a nickel less than what it added in 2004, according to the Energy Information Administration.

That refining occurs at sprawling industrial complexes across the U.S., with most of the biggest along the Gulf Coast. Barrels of crude arrive each day by pipeline, ship and barge. The refineries, by heating, treating and blending the raw oil, turn out products like diesel and lubricating oil.

And, of course, gasoline.


What happens when that gasoline makes its way to your neighborhood gas station?

Major oil companies own fewer than 5 percent of gas stations. Most are owned by small retailers — and many of them say they’re struggling these days to turn a profit on gas. That’s because wholesale gasoline prices have risen sharply in recent months — again, blame it on crude — but station owners have been unable to raise pump prices fast enough to keep pace.

And you can’t keep jacking up the price when drivers are buying less.

Gas station owners face a balancing act: They must try to maintain a price that allows them to afford the next shipment of gasoline but not give the competition an edge.

Stations pay tens of thousands of dollars for each gas shipment before they see a cent in the register. Eventually, many make only a few cents on a gallon of gasoline, a margin that can disappear altogether when credit card fees are added in.

In the Philadelphia suburb of Havertown, Pa., earlier in the week, Sunoco station operator Steve Kehler received a load of gasoline — 9,000 gallons — which, at a wholesale price of $3.729 a gallon, cost him 4 cents more than the previous load.

That left him in a sticky situation: Should he raise prices right away to recoup some of his higher gasoline expenses, or should he hold off for a couple of days in hopes his competitors will also have to raise their prices?

“I’m surrounded by $3.89’s, and I’m already at $3.91,” said Kehler, referring to his prices and those of some nearby competitors. “I’m going to play a little waiting game right now.”

The $33,600 Kehler must pay for his overnight gasoline delivery won’t be debited from his bank account for a few days. That gives him a little breathing room, time to hold prices steady. Hiking prices too quickly will hurt sales.

“I’ll probably change it tomorrow night, at closing,” Kehler said. “I’ll go up 4 cents.”

That will put Kehler at a gross margin of about 20 cents a gallon. After paying credit card fees, labor and rent, Kehler will be lucky to break even on his gasoline sales; many times, he loses money on gas, relying entirely upon his car repair business for income.

Most gasoline retailers long ago got past any illusion they can make money by selling gas. They rely on gas sales to drive traffic to their shops, where they hope auto repairs or food and drink sales will help them turn a profit.

Thank goodness for beef jerky and sodas.

AP Business Writer Adrian Sainz in Miami contributed to this story.