Why Are Gas Prices So High?
Recently a youngziner asked us, “Does the fuel we use at gas stations come from Japan? Is this the reason why gas prices are going up?” It is a very thoughtful question and one we believe deserves an in-depth reply.
Gasoline demand in the US
The gasoline prices at the pump have been getting very expensive recently. The last time we saw prices rise this high was in July 2008. Although US is the 3rd largest crude oil producer in the world, US imports about 51% of its oil -- most of which comes from Canada, Venezuela, Saudi Arabia, Mexico and Nigeria. Now, this crude oil goes through a refining process, and at different temperatures, different products are produced such as gasoline or other petroleum products.
The largest US refineries are located in the Gulf of Mexico region. Refined gasoline and other byproducts are transported along the Mississippi river upstream, and via trucks from the river heads to various gas stations all over the US.
Law of Demand & Supply
Prices of all products are affected by what economists call "Supply and Demand" -- lets try to understand that. Imagine, there are 20 kids in a clubhouse and only 5 computers available to play your favorite video game. The demand for computers will be far greater than its supply.
Now, imagine if you could use candy to trade computer time. Do you think you will have to give up more candy for the computer time, than in another club house where there are 20 kids and 20 computers? Think of situations where there are 20 kids and 40 computers, or a case where you have an unlimited supply of candy.
You may have rightly guessed that the more the number of computers, the less candy it will cost you. Also if the candy does not have a value for you (unlimited supply) -- you may be willing to give whatever it takes to get you the computer time! So you see how the price (number of candy) is a function of supply (availability of computers) and demand (kids). When either the demand increases or there is a supply issue, prices of items tend to go up.
How natural disasters affect prices?
Weather patterns -- such as hurricanes or floods, or political problems in countries that export oil can affect the movement of oil tankers bringing crude oil to the refineries from various parts of the world. Demand for gasoline tends to go up during the summer season when people drive more, or after disasters, when people need to rebuild their communities. As prices go up, it will start reducing the demand as less people can afford it. So you see how demand and supply change continuously -- like a see-saw, and cause gas prices to fluctuate.
More recently Governments around the world have been printing money to ease the lives of people affected by the recent recession. When the supply of money around the world has gone up (like the unlimited candy situation), the price of goods go up.
It is true that the Japanese reconstruction effort has had some effect on oil prices. But as you have seen, the combination of several other factors such as the world money supply, natural disasters, higher costs of producing gasoline among others, are creating a hole in our pockets, every time we visit a gas station.