If gasoline continued to retain its cheap price, despite how much was available, people may pull up to their favorite gas station only to see caution tape around the pumps because frequent consumers would not curtail their consumption. Contrary to what some think, gasoline isnt the only product refined from crude oil. In his article Gas Prices Rising, Matt Rosenberg wrote that, Only about 51. 4% of an oil barrel is used to make gasoline; the rest of the oil is used to make other products such as jet fuel, asphalt, road oil, heating oil and liquefied refinery gas (Para 3, Rosenberg).
This makes oil a high demand commodity around the world and because most countries dont produce enough oil of their own, they have to import it from other countries that have more than they know what to do with. This also creates a global market in which prices can fluctuate depending on who needs oil and how much. For example, China has a booming economy and requires more oil now than they did in years past. Increased global demand causes a shortage in crude oil supplies which results in higher prices for these commodities (jet fuel, lubricants, gasoline, heating oil).
Therefore, the price per barrel of oil increases to curtail demand. This price increase eventually gets passed along to the consumer. As the price for these products increases, fewer people are willing to pay for them. As a result, the demand retreats and eventually so do the oil prices. There are a few more complexities to it (such as shipping costs and where we get it from), but thats generally how it works. In the past, gasoline prices pretty much mirrored the price per barrel of oil. If oil was in short supply and the price increased, gasoline prices would also increase.
However, in the early part of this decade, we saw a new trend with gasoline prices; they started to spike. In his essay about the causes of rising gas prices, Jon Kyl stated: The price per barrel of oil in 2005 was about $70 at its peak and gasoline prices averaged about $2. 85 a gallon. In early 2007, the price per barrel of oil was about $60 dollars ($10 less per barrel) but the price of gasoline was averaging about $3. 25 a gallon or about $. 40 more.
In the later part of 2007, the price per barrel of oil shot up to $98, but a gallon of gasoline was down around $2. 5 on average (Para 12, Kyl). It would appear something other than the price of oil has a much greater effect on the price of gasoline. While oil prices partially cause the rise in gasoline prices, it is apparently not too marginal. After all, when oil was half the price it is now, gas was not half its price. When the oil companies get their oil, they transport it to refining facilities across the country, most of which are in Texas. The refining facilities are responsible for taking the crude oil and converting it into usable products.
When the demand for gasoline increases (during summer months and holidays), these refineries start to approach their maximum operating capacity in order to keep up with demand. This means that they process the oil until they reach the limit of how much oil they can convert into gasoline. Once this happens, a bottleneck develops and the rate at which gasoline can be made hits a maximum. The demand for gasoline continues to rise and once again, the economic principal of supply and demand emerges. As demand increases and the supply remains the same (maximum refining capacity), the price increases.
Its like pouring oil into a funnel; a fixed amount will come out the skinny tube no matter how much oil one pours into the wide opening. Rosenberg presented a puzzling question on this matter: Why was the national average for a gallon of gasoline in 2007 $3. 25 when a barrel of oil cost $60 and now that oil is $100 a barrel the price for a gallon of gasoline is $2. 80? (Para 2, Rosenberg). The answer is consolidation. Consolidation is when two or more companies or corporations merge together. Consolidation in the refining industry has limited Americas refining capabilities.
The three biggest American oil companies ExxonMobile, ConocoPhillips, and ChevronTexaco were once six individual companies. There was a time when the oil industry was not making an astronomical amount of profit, like they do now. When they merged, they also bought out some of the smaller refiners. The top refiners now control more than half of the refining capacity in the United States. Unfortunately, this has allowed the big oil refiners to tightly control gasoline reserves, thus greatly affecting availability and prices.
Without a competitive market the consumer will continue to suffer because there is no incentive for big oil refiners to increase refining capacity when there is a shortage. Spending millions to construct new refineries to produce gasoline faster will only lower their profit margins. Big oil companies made multi-billion dollar profits in 2005 with Exxon Mobile leading the way by posting a profit of $36 billion dollars. Amazingly, in 2006 it beat that mark by earning $39. 5 billion dollars. Even more amazing is in 2007, they beat that mark for a $40+ billion dollar profit, more than any other company in US history.
It is quite obvious that the rising gas prices are outraging people. It is even furthermore obvious that people are angry with big oil corporations. What many forget to think about is their place in this pricing conflict. A majority of people consume more than they need to. There are many causes to the rising of gas prices. Though the shortage of refining capacity and the corporations unwillingness to expand capacity seems to be the major cause, one needs to remember that there is a broad range of thing contributing to the cause. Alarmingly, one might find that they, too, are contributing to the cause.