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Gas Prices: Beyond Supply and Demand

American oil production is the highest that it's been in eight years. Drilling activity is at its highest level in 25 years. But gas prices are still climbing to record heights. Why?


U.S. oil production is at an all-time high. For the first time in 62 years, America is now a net exporter of refined petroleum. We have so much refinery capacity, and such big oil stockpiles, but shrinking demand, allowing refiners to sell more U.S-made gasoline to foreign markets. But even with domestic supply up and anemic demand, retail gasoline prices are up and continue to rise.

View Webinar - Gas Prices: Beyond Supply and Demand

The Price at the Pump

What we pay at the pump is largely determined by the global market price of crude oil. Even with U.S. oil production up our market share is still low and always will be - the U.S. holds just 2 percent of the world’s oil reserves. The cost of crude oil makes up about 63 percent of the cost of gasoline. The remaining variables that determine gas prices are federal, state, and local excise and sales taxes on gasoline sales (about 10 percent), refining profit margins, and distribution and marketing expenses (about 27 percent).

The Price of Crude Oil

The price of crude oil is the dominant variable that determines the price of gasoline. Industry financial documents filed with the Securities and Exchange Commission, show the average cost to produce a barrel of oil was $11 in 2010. The average price these companies received for a barrel of oil was $72, which translates into approximately $2.30 for a gallon of gasoline.

In part, the fundamentals of supply and demand factor into the divide between production cost and market value, which is largely determined by the production decisions of OPEC. Beyond these fundamentals is oil market speculation.

Wall Street Drives up Gas Prices

The price we pay at the pump is inflated by Wall Street speculators. According to a report by Dr. Mark Cooper of the Consumer Federation of America, excessive speculation added about $30 per barrel to the cost of oil in 2011. Last year, at the peak of the last oil price bubble, Goldman Sachs estimated that speculators increased crude prices by around 20 percent and the price of gas by 56 cents a gallon. Speculators drive the cost of oil in the global market, which ultimately determines the price we pay locally. In fact, speculation added $600 to the average family’s gasoline expenditures for 2011.

Learn more about the affect of speculation on gas prices:

November 3, 2011 - Senate testimony of Tyson Slocum, Director Public Citizen’s Energy Program, Excessive Speculation & Compliance with the Dodd-Frank Act.

Increased Drilling will not Lower Gas Prices

As long as we are dependent on oil we will be vulnerable to the volatility of this finite resources and the manipulation of financial speculators, who artificially drive up oil prices. Therefore, the perennial response for increased offshore drilling is a huge misstep. Increasing permitting and opening up new sensitive areas to deepwater drilling will not lead to lower gas prices or energy independence. In fact, the government has found that expansion of all offshore drilling would have an “insignificant” impact on gas prices.

Moreover, unconventional oil sources (tar sands, shale and deepwater) are actually more expensive to extract and are far more dangerous and polluting then conventional oil production, which is on the decline.

The only real solution is to detach our dependence on oil through the promotion of alternative fuels, implementation of the best available technology in fuel efficiency, the expansion of mass transit, greater sustainable planning of our communities, investment in distributed renewable energy generation and investment in building energy efficiency.

Additional Resources:

Updated April 2012

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