Why Is Gas So Freakin' Expensive?

Did you know that gas price gouging almost never occurs as prices rise? Rather, it’s most often when dealers keep prices artificially high even as their costs fall.

As gas costs rise to $4 a gallon and oil companies earn around $100 billion each year, it’s a good time to question what really goes into the price of gas.

The numbers on the gas station sign hide a complex set of transactions. Before gas can power your car, it must be discovered as crude oil, traverse three markets, and be refined from crude into gas.

Inside, we’ll explain the three markets, walk you through the role of refineries, and show how oil companies use creative tactics to manipulate gas prices…

The Three Markets: Contract, Spot and Futures

Both oil and gas are traded on three markets: the contract market, the spot market, and the futures market. Each is influenced by different factors and impacts the price of gas at different stages of production. Unlike the futures market, the contract and spot markets are not the kind of markets found on Wall Street; they are informal networks of businesspeople.

The Contract Market
Though it seems like oil companies spend most of their time ruining your day by raising the price of gas, their primary business is exploration. Once an oil company finds a field and coaxes it into producing crude, it takes that unrefined oil and sells to refiners. The vast majority of oil is sold by contracts. A veritable orgy of contracts signed between oil companies and dealers, oil companies and refiners, refiners and independent dealers predetermine the fate of most oil and gas.

Refiners plan their purchasing and refining activity to ensure that these contracts are fulfilled. In exchanged for this privileged standing, refiners charge contract customers a premium.

The Spot Market
Need some extra oil? Got a spare barrel you need to sell today? The spot market is for you. The spot market fills the gap left by the contracts market. When a refiner needs extra oil to meet its contracts, they find people with surplus oil on the spot market. Unlike the contract and futures markets, which trade pieces of paper, the spot market involves the trade of actual barrels.

The best deals are often found on the spot market. Since neither the buyer or seller is locked into a prearranged deal, the laws of supply, demand, and free market are mostly in effect.

The Futures Market
Crude oil is the bees knees of the American Mercantile Exchange. A futures contract might stand for 1,000 barrels of West Texas Intermediate to be delivered at Cushing, Oklahoma. The futures market represents that collective state of the oil market at any particular moment. When you hear reporters talk about the price of oil reaching $100 per barrel, they’re talking about the futures market. Because fluctuations on the futures market are driven by information, its prices guide the contract and spot markets.

The people buying and selling futures rarely, if ever, collect on their contracts; a seven year period saw 5 billion barrels traded, of which only 31,000 were ever delivered.

Refineries

Refineries are the temples where crude oil gets Bar Mitzvah’d into gas. Shifts in the refining world over the past two decades have helped ratchet up the price of gas. In the early 80’s, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn’t see refining as a place to generate profit, but as an integral part of a larger operation.

By 2002, there were only 153 refineries, and most of them were no longer controlled by the oil companies. Refineries are now held privately and independently, and as with any independent businesses, profit is key. It is in the refiner’s interests to supply only as much gas as is absolutely needed to stay on the profitable side of the supply and demand curve.

Gas emerging from a refinery is sold at what is known as the ‘rack price.’ The rack price is the cost of gas to dealers, and it is generally influenced by the spot and futures market. The rack price is also where branded gas begins to exert a price premium.

Branded gas from Exxon-Mobile, BP-Amoco, etc, isn’t different from the unbranded gas found at Joe Schmoe’s Gas Shack. Still, there are several costs associated with branding gas. The brand name carries a premium, since people might associate it with quality, and not grossly overcompensated executives. Branded gas is also sold under contract, giving buyers long-term stability that can’t be duplicated by unbranded gas. Oil companies also add value to branded gas by providing ancillary benefits that command a price premium, like branded advertising and branded credit cards.

Refiner pricing strategies are almost as complex as the mating rituals of the red-sided garter snake. Though refiners want to maximize their profit, they don’t necessarily want to gain additional market share. Refining capacity can’t simply be ramped up on demand. Acquiring and refining crude oil takes considerable time, leading refiners to take a slow and steady approach to business. First and foremost, refiners care about fulfilling their contractual obligations. Leftover gas can be sold for profit on the rack.

If a refiner’s rack price is consistently too high, dealers will take their business elsewhere when their contracts expire. If the rack price is too low, buyers might swamp the refiner, leaving it unable to meet its contractual obligations.

To ensure pricing continuity, refiners used to call each other and share pricing information. Activist judges on the Supreme Court called this “collusion.” The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn’t be surprised if it involved a members-only group on Facebook.

Gas Stations

Ah, gas stations. Nourishers of our cars, wellspring of our rage. Gas stations are not all alike. Some are owned outright by the oil companies, while others are leased by dealers who sell only one brand of gas.

There are supposedly nine benefits to being a branded lessee-dealer:

(1) a wider variety of grades of gasoline than unbranded, which leads to higher gross profit margins,
(2) access to oil company credit card at no fee,
(3) oil company third party fee discount for VISA and MasterCard,
(4) “subsidies” in the form of soft loans and investments,
(5) marketing assistance,
(6) rebates based on incremental volume,
(7) training and support on how to run a profitable gasoline station,
(8) technical support and station startup design, and
(9) security of supply.

There are also open dealers, who sign contracts with a particular brand, but can shift their allegiance whenever the contract expires. Open dealers interface with refiners through middlemen known as jobbers. A jobber will often supply several dealers, and depending on the size of the operation, will sign contracts, or buy unbranded gas either from the rack or the spot market.

Finally, there are the true independents. These folks shop around for the best unbranded gas price, sometimes aided by a jobber. They almost never sign long term contracts and almost always get their gas from the rack or the spot market.

At the turn of the 20th century, the U.S. had just under 175,000 gas stations. Of those, about 55,000 are run by independent operators. Of the remainder, half are run by open dealers, and the other half is split between company-owned and lessee-dealer stations.

Fixing The Price Of Gas

Oil companies set the price of gas at company-owned stations. What they say, goes. With lessee-dealers, the relationship is more complex.

Lessee-dealers are charged a ‘Dealer Tank Wagon’ (DTW) price by the oil companies. The DTW price is set either by the oil company’s central or regional office, and is driven by both the spot and futures markets. Most importantly, oil companies determine the DTW price by looking at the prices of other stations in the market. This is why two stations with the same brand a block away from each other can have different prices.

Lessee-dealers can’t negotiate a DTW price since they sign contracts with just one oil company that require them to purchase a minimum amount of gas. Oil companies allow dealers to sell gas at a slightly inflated margin to ensure a profit stream so the dealers can put food on their family’s table. That margin can range from 3-10 cents per gallon.

Why don’t dealers just raise the prices more, like 20 cents a gallon, so they can give their families even more food? Some do. If they’re caught, you can bet anything the next DTW price will be higher, bringing their profit margins back to normal – only now, their gas is more expensive than their neighboring stations and they have a competitive disadvantage.

DTW pricing is the product of an exceedingly complex and secretive pricing scheme known as zone pricing. A zone can be as small as a single gas station, or as large as a city. The testimony of a Mobil representative in 1997 revealed that Mobil had 46 zones in Connecticut. Most dealers have no idea what zone they are in, even though the DTW price given to their neighboring stations can determine their standing in a local market.

Oil companies, like politicians reapportioning voting districts, rely heavily on technology to slice apart local markets. The DTW price in each zone will be different, taking account several factors including nearby competition, demographics, and the historical demand of the zone. Oil companies also seek to determine the price elasticity of each zone, or how much the zone will pay for gas before looking for alternative suppliers. For some zones, that breaking point is a penny, for others, it two or three cents, and some will stay with their station out of a sense of loyalty. These factors can cause the price of gas in neighboring zones to fluctuate by as much as a dime.

Oil companies adjust zone price by considering what their competitors are doing. The price of rival gas stations will be surveyed two or three times a week, or the data will be relayed to the oil companies by refiners.

Taxes

State and federal taxes account for about 18% of the price of gas. The cost is a constant and is factored into the baseline price of gas.

Eliminating those taxes would reduce the price of gas by a few cents, but would do nothing to otherwise address the underlying factors involved in pricing gas.

Ok… so why IS gas so expensive?

A butterfly flaps its wings in the Saudi desert, causing the State Department to release a warning of increased terrorist activity. The futures market flips out, sending the price of crude skyward.

The higher price on the futures market makes it more expensive for refiners to acquire crude to refine into gas. When the refiner’s work is done, the emerging gas will be priced accordingly higher. This raises the rack price and the prices on the spot markets. Oil companies and jobbers with long-term contracts might be insulated from the higher price, depending on their contracts.

Refining oil into gas isn’t instantaneous, and there can be a lag before the higher price of the oil is reflected in higher gas prices paid by jobbers and oil companies. That, of course, didn’t stop them from raising prices the moment the futures market jumped. So now that the oil that was purchased for refining at a higher cost is ready to hit the market as gas, the oil companies will raise prices again.

This double-dipped price is passed onto dealers as the DTW price, which is then inflated yet again so the dealers can turn a profit.

You paid more for gas thanks to a butterfly.

“It’s just a !@$% butterfly!,” you say. Sure, but it scared the hell out of the markets. Since the oil companies all move in lockstep, that butterfly can cause the price of gas to rise for several days as one oil company sees another raising prices and adjusts accordingly.

Eventually the markets will calm and the price will begin to fall. This allows the introduction of a friend much more insidious than the butterfly: price gouging.

Despite popular misconceptions, price gouging almost never occurs as prices rise. Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the DTW price has declined.

Sticking with our butterfly friend, let’s say she caused the DTW price of gas to spike for four days. It may be ten days before dealers lower their prices. That’s price gouging.

Most people never notice true price gouging. They will complain that the price went too high, but that’s the fault of the oil companies, not the dealers. Prices that stay high for too long go unnoticed. Just because the price of gas stays high does not mean that a dealer is price gouging. The price may actually be higher. That’s why it’s almost impossible to prove, let alone prosecute, price gouging.

Conclusion
Most of the above draws on the excellent work of the Senate Permanent Subcommittee on Investigations, which produced a 324 page report that makes for a fascinating read. Direct links to the report sections are below:
Executive Summary
Introduction
The Production and Marketing of Gasoline
The Effects Of Market Structure And Concentration On Gasoline Prices
How Gasoline Prices Are Set

Unless you’re a Saudi Arabian butterfly, you can’t hope to control the oil market, but you can control your consumption. Reduce your gas costs by carpooling, biking, walking, using gas price finder sites to decrease the information asymmetry, and/or switching to a car with a better MPG. – CAREY ALEXANDER

RELATED:
Get 30 More Miles Per Tank: Turn Off Engine If Idling More Than 10 Seconds
Potentially Insane Ways To Increase Your Fuel Efficiency

(Photo: Getty)

Comments

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  1. tigerjade says:

    Interesting. But what about when gas stations show a large price jump just before a big event? Down here in and around Concord, NC, the price of gas near the speedway jumped TWENTY CENTS in two days as the fans started arriving. And now that the race is over and they’re out of town, gas prices are slowly dropping. And prices in Charlotte maybe just jumped a few cents for Memorial Day, not 20+.

    Isn’t that gouging?

  2. zibby says:

    Gasoline I can understand. Why the hell is bottled water so expensive?

  3. justin.ryan says:

    @tigerjade: I used to live a few minutes from a beach town in NJ and every weekend in the summer, the gas would go up 10-20cents Friday afternoon, and back down by Monday morning. Except it would only go down about half as much as it went up.

  4. vr4z06gt says:

    thats a really long article for information i kinda already knew….but i did learn some new stuff and it looks like you put some time into so im going to give you a B+. If you have any questions feel free to talk to me after class. There is no Extra Credit available in my class.

  5. vr4z06gt says:

    @zibby:

    read the article on why coke is so expensive, the soft drink not the drug, that should clarify it better. http://consumerist.com/consumer/food/the-history-of-the-pr

  6. GitEmSteveDave says:

    If taxes account for 18% of a gallon of gas, cutting them would be more than “a few cents”. On a $3 gallon of gas, that’s .54¢. On a 20 gallon fill up, that’s over $10. Hardly a few cents.

  7. crayonshinobi says:

    @zibby: It’s to prevent development of water as an alternative fuel source to gasoline. :D

    A gallon of milk is cheaper than gasoline though…maybe we should try using milk as a fuel…

    I gotta go, patent office awaits.

  8. B says:

    Price is a function of supply and demand. There are lots of cars and other things with a high demand for gas, and a shrinking supply, therefore the price is high. If you don’t like it, stop buying gas, which will reduce demand, causing a drop in the price.

  9. Greeper says:

    awesome article. My only quibble is that the major branded gasoline is not the same as unbranded gas. true, it comes from the same terminals, but branded gasoline has additives, which increases efficiency and reduces long term maintenance. for some kinds of cars whose engines are engineered with tight tolerances (eg, BMWs), unbranded gas is not a good idea because you need additives to keep the gunk buildup down. there is not a huge difference between the additive packages among majors, though the studies i saw (several years ago) show exxon, mobil, amoco (not sure if their additivers exist or if they just use techron now), and chevron techron are the best/cleanest. i wil occasionally use unbranded gas but you should be sure to use a gas with additives as it saves $ in the long run.

  10. enm4r says:

    @tigerjade: It’s the same way with college towns, spiking gas $0.10-0.15 before and after the dorm move in and move out weekends.

    I don’t see how it’s not price gauging, and it’d take one hell of an argument to convince me otherwise.

  11. banned says:

    poor, poor Americans, have to pay over $3.00/gallon. I feel so bad for you, no wait, I don’t feel bad at all. How about the rest of the world paying twice that?? Are you complaining for them?? No, you are too self-centred. I hope you end up paying competitive prices, maybe $6-7/gallon, maybe then you would all wake up. I doubt that but at least the oil companies would make even more billions off you. The easy answer; “Get off the oil, man”,

  12. MrGuts says:

    Fascinating stuff, but I do love conspiracy theories! The price per gallon contains 40%(+/-) in tax. Fastest way to raise tax revenues is to raise the price of fuel, eh?! No bill, no vote, its instant! Would it not seem that the Federal and State Governments play some role in pricing. Well placed players in the pricing chain, oil lobby, or whtever club gets this stuff done can do a lot it would seem. California has been fixing a lot of roads since this last big rise began 18 months ago. Hmmm. At least the money has been going to good use here.

  13. bluemeep says:

    Huh. That was a really interesting piece to read through… Gave me a headache, but at least my head is throbbing with knowledge. I suppose I can stop blaming the Illuminati for it all now…

    …Or can I…

  14. Moosehawk says:

    @GitEmSteveDave: They weren’t saying if you cut out all 18% of tax on gas prices. That 18% is used mainly to fund new road, road repair, and bridge construction. If you cut out 18%, where would that money come from?

  15. Moosehawk says:

    @rocnrule: Why would we complain for other people when we don’t have to pay your prices? Complain for yourself.

  16. zephyr_words says:

    @Everyone about price gouging during increased levels of activity in their local market:

    The sellers can increase the price right before a large event because the demand of their product will be much higher than normal. It’s not price gouging; they have a product, a demand, and persons X are willing to pay the price for the product.

    The slowly dropping of the price after-wards is more to be frowned upon IMO.

  17. banned says:

    @moosehawk: I’m not complaining, I’m off the oil. Plus I live in Canada so prices are about the same as you. My point is, you’re getting a good deal and if its still too much, then consider walking, or getting a better car.

  18. minneapolisite says:

    Summer weekends many Minneapolisites head for the lake country. I live just off the most frequently used route to access the lakes (I-94) and it’s almost comical to watch the gas prices rise and fall with the lake traffic. I’ve seen prices increase about 20 cents Friday morning, then drop back down again Monday afternoon. On holiday weekends (like this Memorial Day weekend) the price hike adjusts accordingly. Isn’t this considered price gouging?

  19. mikyrok says:

    Good read. Thank you for this wealth of information Carey.

  20. Curiosity says:

    Shouldn’t there be antitrust concerns?

  21. minneapolisite says:

    @rocnrule: What country are you from?

  22. Toof_75_75 says:

    Our prices aren’t that bad, but they aren’t amazing either…It would be one thing if we were complaing and our prices were like some of the below listed:

    Panama – Panama City $2.19
    Russia – Moscow $2.10
    Puerto Rico – San Juan $1.74
    Saudi Arabia – Riyadh $0.91
    Kuwait – Kuwait City $0.78
    Egypt – Cairo $0.65
    Nigeria – Lagos $0.38
    Venezuela – Caracas $0.12

  23. zibby says:

    Bah. You can barely afford to buy gas for your car anymore. Forget about using it for entertainment purposes like setting things on fire or health applications like getting rid of the crabs. It’s a shame.

  24. lusis says:

    “Sticking with our butterfly friend, let’s say she caused the DTW price of gas to spike for four days. It may be ten days before dealers lower their prices. That’s price gouging.”

    Why is it price gouging? In a free market, there is no price gouging per se. There is only the price that someone is willing to pay. If someone isn’t willing to pay the price then the price will drop.

    I don’t understand why you’re trying to absolve the consumer of his responsibility in the free market system. Less than two miles from my house there is a gas station that sells gas for 3.15 a gallon. If I drive five more miles down the road, there is a cluster of gas stations that sells for 6 or 7 cents less.

    As to “event pricing”, as someone else mentioned, it’s all about supply and demand. A gas station with no gas is useless. There’s no one to come in and buy the real money makers like Coke or candy bars. In order to mitigate that high demand, the prices rise.

    People also seem to forget that the cost to acquire replacement fuel must be taken into account. It doesn’t matter if you have the lowest prices in town, if you can’t refill the tanks when that current supply is gone, you’re out of business again.

    Make no mistake, “price gouging” laws are nothing more than a politician’s attempt at making you feel like he’s actually DOING something.

  25. Buran says:

    @rocnrule: Why don’t you look into all the programs, such as educational assistance and true universal health care, that is funded with the higher gas taxes, before you open your mouth? I wouldn’t mind paying more for gas if I didn’t have to pay for health care like I do now. It works out even in the end.

    But oh no it’s easier to bash than research.

  26. Buran says:

    @lusis: Lots of us are unwilling to pay.

    But we don’t get paid at ALL if we don’t go to work …

  27. lusis says:

    @rocnrule:
    I wish we WOULD pay the actual price to get us “off the oil”. The federal government currently subsidizes the cost of fuel so the end user never sees the real price.

    I also think we need to allow more refineries to be built and allow drilling off the coast of California and Florida. This NIMBY attitude they have has got to go.

    I’m also against drilling in ANWAR though. This probably comes from having a wife who works for EPD and explained to me what the REAL plan for ANWAR is.

  28. orig_club_soda says:

    Not to mention that the cost of a barrel of oil is purely driven by emotion not actual numbers.

    And the resone why oil companies make so much money is because we consume so much oil. Their profit margins range from 6-9% – often less than sales tax!

  29. @rocnrule: I know, I’ll get on my bike and commute thirty miles round trip to work. Ass.

  30. lusis says:

    @Buran:

    I never said it would be easy. God knows I hate now working for a company in-town instead of 7 miles from my house when it comes to filling up the tank.

    But I love the company and the pay raise offset the new cost of fuel. Additionally I get the option to work from home twice a week.

    One thing that I have at my disposal that others might not is:

    http://www.georgiagasprices.com/

    My dad is a truck driver and the fuel prices have hit him especially hard. But he has a laptop and Verizon wireless highspeed so he can actually plan his refueling much better. One website he uses will tell him the gas prices for the next 20 miles so that he can better plan his stops.

  31. DeeJayQueue says:

    What I don’t get is this:

    Gasoline is not the only thing crude oil is made into. Petroleum is made into tons of other things like plastic. How come we don’t see Tupperware prices surge at the same time as gas prices? If the futures market is controlling the price of oil, it should get more expensive across the whole board for everyone who uses it, not just gas refineries.

  32. lusis says:

    @orig_club_soda:

    I’m glad I didn’t have to be the one to bring up profit margins vs. profits.

  33. banned says:

    @Buran: Uh, I live in canada where prices are roughly the same as in the US and guess what??? We have National Health Care and better education so I hardly see the point.

    @Toof_75_75:

    Lets look at prices from Developed countries;

    U.K. $7.25
    Argentina – 6.60
    Japan – 6.60
    Holland – 6.40
    Germany – 5.60

  34. lusis says:

    @DeeJayQueue:

    It’s all about process and capacity. What it takes to convert crude into plastic is much less than what it takes to convert crude into gas. I could probably dig up the specific process. Combine that with no new refineries in the US in 20 or so years and there’s simply not enough throughput.

    Also there’s a very healthy and active recycling community with plastics which I’m guessing (no actual facts mind you) probably offsets some of the cost of acquiring raw materials. Unfortunately, we can’t recycle gas yet ;)

  35. backspinner says:

    @rocnrule: It’s all relative. Don’t you think many Euros would scream bloody murder if they lost one of their 6+ weeks of vacation or if a few hours were added onto their 35 hour work weeks?

  36. stephen5 says:

    Federal gas tax is 18.4¢ per gallon, states add on ( so do cites.)
    Here in the great state of Misery we pay an extra 17¢ per gallon, you folks up in NY pay 31.9¢ extra to the state and an estimated 7.9 cents per gallon in county taxes.

    Here (as in most states) all tax revenue goes into general revenue and not some special “lockbox” for road repairs. Usage and license fees are supposed to pay for repair and expansion…

    See how much you state is rakin’ in:

    http://www.gaspricewatch.com/usgastaxes.asp

  37. adamondi says:

    In the early 80’s, there were over 350 refineries, mostly owned by the oil companies. The oil companies didn’t see refining as a place to generate profit, but as an integral part of a larger operation.

    By 2002, there were only 153 refineries, and most of them were no longer controlled by the oil companies.

    This is the only part of the article that you really need in order to know why the cost of gasoline rises steadily every year. If you have a diminishing supply, and a growing demand, the prices will go up. That is all there is to it. Since it is essentially impossible to build a new refinery in the United States due to environmental regulations, there is little hope of an increased supply in the future. The only thing we can hope for is less consumption in order to lower demand. However, given the fact that most people I know drive trucks or large V6 or V8 cars all the time, even with no passengers, that is not likely to happen.

    So, either we must loosen or repeal environmental protections in order to build more refineries (bad idea), or we must reduce our consumption (really good idea). How many people do you know who drive SUVs or big honking cars all the time, but could switch them out for motorcycles or little cars easily? I would say that 90% of the people at my office building could drive much smaller cars, save tons of gas, and be better off for it. But they drive trucks, SUVs, and huge sedans instead.

  38. ChiefDanGeorge says:

    Posting the price of gas in other countries is not a basis of comparison unless you include the amount of tax that is added.
    We have low taxes on gas in the US in comparison with the rest of the world. I’d gladly pay more federal tax for a pay off in public transit, however that is not going to occur.

  39. tizzed says:

    @DeeJayQueue

    Again, plastics prices are determined by what they can sell it at, and consumers will not tolerate a 200% spike in tupperware. So, the companies’ margins on those products have gotten killed.

    GE just sold their giant plastics division because oil prices have essentially made it unprofitable.

    Oh, and who did they sell it to? A Saudi company that really doesn’t have to worry as much about the rising oil prices.

  40. An excellent read. Thanks, Carey. Way to take Consumerist to the next level.

  41. MeOhMy says:

    The price is set by emotion and not supply and demand. Everytime a news source reports that gas prices are going to rise, everyone up and down the supply line is more than happy to oblige them.

    A voluntary and permanent moratorium on media agencies offering speculation that fuel prices may rise might be pretty helpful.

  42. Hawkins says:

    I’m sorry, but I still don’t understand the concept of “gouging.”

    There are precious few refineries, and so gasoline is scarce. The gas companies charge what the market will bear.

    The FA says:

    price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the DTW price has declined.

    But isn’t that the same thing as saying that the dealer thinks that the market will continue to bear higher prices, so he keeps them that way until the market stops bearing the high price?

    I’m no apologist for big oil, but when I hear talk of legislation to “fix the gasoline price gouging problem,” I get the gibblies.

  43. hokiexterra says:

    @ MrGuts:

    Fortunately, the lawmakers aren’t smart enough to make the taxes a % of base gas price. Typically here in the US, it’s a fixed # of cents/gallon. For instance, NC’s tax load on a gallon of gas is in the neighborhood of 30 cents, regardless of the gas price. In other words, at $1/gallon, the taxes are 30%. At $3/gallon, the taxes are 10%. (roughly) And NC has the highest tax loading in the Southeast (and almost the most state-maintained paved roads in the nation).

  44. hokiexterra says:
  45. iMike says:

    Dugg.

  46. cgarison says:

    I am just really glad that my Land Yacht does not run on printer ink. Have you priced the consumables for an inkjet printer recently. $10.00 for 6ml of ink!

    Ink Jet Crtridges – Now that is price gouging. Gasoline – That more of an extra tug on the wallet.

  47. ExGC says:

    @DeeJayQueue: lusis is correct, but there are other factors in play as well. I used to work for one of the big consumer plastics companies (not Rubbermaid, but one of its competitors) and these companies are very active in the futures markets as well, constantly hedging their risk to avoid sudden price fluctuations. The other reason is that there is no pricing power with these products. If you want a plastic box (or janitor’s cart, or trash can or whatever), you get a one – you don’t care who the supplier is and the products are essentially fungible. We used to joke that it was like selling dirt.

  48. kewpiedoll99 says:

    one thing i don’t understand – presumably all of the mechanics of the price setting is the same in developing countries as well as in developed. so what accounts for the huge difference in prices between

    Panama – Panama City $2.19
    Russia – Moscow $2.10
    Puerto Rico – San Juan $1.74
    Saudi Arabia – Riyadh $0.91
    Kuwait – Kuwait City $0.78
    Egypt – Cairo $0.65
    Nigeria – Lagos $0.38
    Venezuela – Caracas $0.12

    and

    U.K. $7.25
    Argentina – 6.60
    Japan – 6.60
    Holland – 6.40
    Germany – 5.60

    ???

    obviously it’s got to be taxes, i.e., community add-ons. also, i seem to recall reading how the US govt subsidizes the gas companies to such an extent that they made collossal, record revenues and income figures in the past couple years. how do we get that stuff removed from the equation?

  49. rouftop says:

    So is Arco gas bad for my car or what?

  50. NoneMoreBlack says:

    @adamondi: You’re committing a fallacy. The number of refineries isn’t the only number that’s significant; individual refineries are larger and have greater outputs. All this number shows is that they are taking advantage of economies of scale. Aggregate refinery capacity has increased steadily, as has consumption.

    There is no such thing as “charging the price the market will bear.” Firms in the market determine what OUTPUT (quantity, not price) will maximize their profits, GIVEN the shape of the demand curve they face. If their costs rise, they will have to restrict output. If demand rises, they can profitably produce more.

  51. virgilstar says:

    @something_amazing: “I know, I’ll get on my bike and commute thirty miles round trip to work. Ass.”

    Why not move so you don’t live 30 miles from work? This kind of attitude is just failing to see the real root of the problem. The only reason Europe (and the rest of the planet apart from oil-rich nations) can survive on gas that is double the price we pay in the US, is because long ago they made planning decisions NOT based around the car. The interstate highway system was designed to move (troops) around the country and BETWEEN states. It was never meant to be an engine for suburban development so people can live out in the country and drive to work.

    My biggest issue with this gas thing is the constant whining based on bogus economics. Last year gas was $2.70/gal. If your car/SUV gets a measly 15mpg and you have a 30-mile commute in each direction, then gas going up to $3.50/gal is gonna cost you a whopping $16 a week extra – that’s a crazy ass-busting $3.20 a day! Oh my God, the skies are falling in! If you can afford a drive a 15mpg car (likely an SUV costing $25k plus), and live 30 miles out of town in the countryside, then you should suck up the $3.20 a day for your stupid lifestyle choices! The above represents an extreme scenario (most cars get better gas mileage than 15mpg highway). If you’re working at McDonalds you shouldn’t be able to afford the car/house/lifestyle that got you inot this mess in the first place. You get no sympathy from me if the above numbers apply.

    Sorry ot come across as self-righteous, but as someone who has deliberately made choices to protect against this type of scenario (living never more than 2 miles from work, cycling or walking there and driving only on weekends), it just ticks me off when people want the government to bail them out for their own irresponsible decisions.

  52. shoegazer says:

    @kewpiedoll99: Russia, Venezuela and the OPEC members of course set aside a fixed amount of the stuff they pump out for their own use. These are also not sstrong market economies so the costs of refining and distribution are offset by the oil revenues. As a starting point you can (and should) use the spot crude price ($/bbl), which is multiplied by a certain factor per country to obtain your base price.

  53. beansac says:

    @tigerjade: I seriously recommend taking some economics classes and find out what supply and demand is. You talk like having more demand for gas wouldn’t raise the price.

    If people are willing to buy gas for $15 dollars a gallon, then people will sell it for $15. If you think the price is unfair, then DON’T BUY THE GASOLINE. Nobody is forcing you to fill your Expedition to the brim with gasoline. Some of these people think that free markets should not be allowed to work, and that the government should run the business instead of a private individual. People have tried that (Stalin, Mao, Kim Jung Il, Pinochet), look at the results. Russia is still recovering after almost 20 years of recovery from the socialists; China is moving towards freedom; Four million people have died in North Korea and Milton Friedman and other U of C economists saved Chile from a certain fate.

    If you think the price of gasoline is unfair, don’t have mommy government step in, just DON’T BUY THE GASOLINE. If there is price gouging, people will stop buying the product, and the business will have to lower prices to simply stay afloat. I feel foolish saying it again but some people don’t get it: DON’T BUY THE GASOLINE.

  54. Android8675 says:

    regulation in the states drove the little guy out of business that was keeping the big oil companies in check. Hell I’m kind of suprised we aren’t at $6-$8 like the some of the more expensive areas.

    our governement is messed up. Everyone carpool, I know it sucks, but buy a PSP with the money you save not driving.

  55. zolielo says:

    @Greeper: Additives are the most significant difference in brand and unbranded gasoline for sure. Governmental regulation sets a base for the quality of all gasoline in an area however you are right in that the base is often not sufficient – BMW I recall recommends gasoline with particular standards.

    @adamondi: Yes the lack on additional refineries is definitely a factor that the article did not touch upon enough. Also several states require special bends of gasoline further bounding the situation. Barriers to entry from competition, government regulation, and the local “not in my backyard” populous surely come into play.

    @Carey Greenberg-Berger: It is getting to the point that there are increasing vertical and horizontal unity (not by definition monopoly) of a firm which coupled with near oligopoly coordination between firms leads to non-market conditions in the oil industry. What can be done to counter that is not transparent, at least to me.

    @virgilstar: Housing relative to commute is often too complex a system because of personal limitations and bounds to be simplified in the manner which you have put forth. Sure living within one’s means is the proper way to live, but that is non sequitur to your statements. Also the externalities of national defense should not be overlooked simply because it is not the original primary use. The interstate highway system (personal travel, …), internet (personal communication, …), extraterrestrial endeavors (global communication, maps, …), etcetera .

    For a Lifehacker style tip: Similar to how a Starbucks is an indicator of the gentrification of a neighborhood the addition of a Costco gasoline station is an indicator that the local gasoline stations are competitively over priced. Note: that Costco gasoline is relatively additive free.

  56. quiksilver says:

    Nice work….

    The thing that really pisses me off is that no one makes a big deal about the profits of the oil companies… They keep jacking up the price of gas while their profits are through the roof… billions of dollars for ONE QUARTER! BASTARDS. That right there should be taken seriously and looked into and get the “problem” fixed.

  57. Rusted says:

    Of course you-all could do like me and own some of that fine Exxon-Mobile stock. Hoping for 4 this summer…..

  58. MikeTheKat says:

    In my part of NY the local county said they would not hold their sales tax when gas prices shot up during Katrina & Rita stating while they buy gas wholesale they still have higher costs so the tax shoud remain. Well maybe and maybe not. They are still paying far less than us and it is our tax dollars paying for it. They should learn to be more efficient in their vehilcle use and how they run their fleet. Maybe they should use other fuel sources for their equipment like Biodiesel.

    Either way NY is the worst state when it comes to taxes and yet the tax payers keep electing the idiots in charge. Change begins at home and with our decision to vote or not to vote. So vote the idiot out and put the new idiot in.

    Politicians do crack me up when they hold hearings and discussions, do they actually think that oil execs are going to admit they are gouging the american people, I think not.

    Don’t forget politicians just give themselves a raise and they use gov’t vehicles or lobbyst funds to pay for their gas.

  59. asherchang says:

    Thank God for this post. Seriously, I’m tired of people talking out of their asses about gas economics and blaming everything on price-jacking by big companies. It is ALOT more complicated than that people! (And I won’t pretend to understand it, but we shouldn’t create any villains here)


    Anyways, what’s funny about this whole thing is that as much as we will complain about gas prices, we’ll never change our driving habits, and our food will always be shipped from far far away, and we’ll always shell out money for that little smidgeon of comfort.

  60. asherchang says:

    @quiksilver180: actually, everyone does make a big deal. but still. if gas was sold dirt cheap, we would run out of the cheaply extracted oil right away, and be stuck with the hard-to-get oil that would amount to $4/gallon gas.

  61. asherchang says:

    @kewpiedoll99: some countries keep gas prices artificially low with taxpayer money. which is a horrible thing to do, because then you’re gonna end up with alot more pollution, and your people are gonna suck up the world’s oil cuz they don’t care the price of gas that much.

  62. Rob O. says:

    Quite aggravating to me that not enough is said nor done about making the most fo the fuel we’re paying out the nose for.

    Bigger and faster is NOT better. “Zero to 60″ scores are NOT relevant unless you’re driving a racecar – the average speed limit during my commute to work is 40 m.p.h.

    There’s little or no reason for any average commuter to own a vehicle that’s powered by a 6 or 8-cylinder engine. Yet you sure do see a disproportionate number of idiots driving quad-cab Ford Lariats, Chevy Tahoes, & other monstrously oversized vehicles for doing nothing more than commuting to work or the grocery store – alone.

    But the prevailing attitude here in Texas – and I suspect most other areas of this country – is something like, “By God, if you ain’t got yerself a big dick truck, well heck, ya just ain’t much of a man, now are ya?” Tell people that your daily driver is equipped with a 4-cylinder engine and they’ll cast a shameful look at you as though you drove to work on a lawnmower.

    It’s high time that automakers & advertisers take responsibility for the public’s mindset and get budy with altering the misconceptions that they’ve fostered for the sake of profits.

  63. sully127 says:

    Your bit on refineries left off one important ingredient–and the one that’s caused the sudden surge in gas prices: maintenance. Right now we have and eight-fold increase in the number of refineries offline for spring maintenance (http://www.reuters.com/article/domesticNews/idUSN1620905020070516?src=051607_1611_DOUBLEFEATURE_&pageNumber=2).

    I was living in California when Enron pulled this same stunt with electricity. They asked/told plants to go offline for ‘maintenance,’ causing rampant blackouts.

    Now we’re getting the same tactics with fuel. That’s why our gas is so expensive right now.

  64. MaliBoo Radley says:

    @backspinner:

    My husband and I live in the UK. Where can we sign up for this 6+ weeks of vacation and 35 hour work week? My husband gets 4 weeks vacation and regularly works 45+ hours a week.

    Also @Buran

    Haven’t we had this chat before?? Most Europeans DO NOT pay for there health care with petrol taxes. If that we’re true, we wouldn’t all be paying up to 40% of our income in taxes + a special tax for health care/national insurance.

    Here in the UK, 70% of the price of petrol is tax. This tax goes to schools, roads, guilt and a government who is quite used to and comfortable with it’s petrol revenue.

    Enjoy your cheap gas while you can. It won’t last forever.

    When I was in high school in VA, gas was 99 cents a gallon (1995). You won’t see that again.

  65. doctor_cos wants you to remain calm says:

    Change my driving habits? Drive to work or work for minimum wage (and not be able to afford a car/food/rent, let alone gas).

    Don’t tell me to look into alternatives that are NOT THERE thanks to big oil/car companies/bought and paid for government.

    Don’t worry, the oil will be GONE in ten years or so anyway.

  66. dpritch15 says:

    The gas gouging bill is just plain silly.

    The intro to a rant on my blog:

    Our diligent lawmakers in the House passed a bill that would make gasoline price gouging a federal crime. I guess gouging the public with pork projects, bridges to nowhere, and subsidies to increase our daily costs is not high on their list of atrocities against U.S. constituents, but intervening in free market forces in an attempt to artificially cap commodity prices is deemed as a worthy cause. I have a problem with this nonsense. I can think of very few times where the country actually benefited from having the price of any particular good or service regulated by law, as opposed to free market capitalism…

  67. terry-j says:

    Want to stop high pump prices then lets stop using oil. However we need to start with our cars. We need a way to change them over to burn something other than fossil fuel. In the late 60’s to early 70’s a man did a special on just this kind of thing. Everyone’s existing cars could be tuned to run on fuel made from eucalyptus leaves. For 10 years he planted trees in every place in the world to prove they could be grown any where. And that no country would ever have to import the leaves, all countries could make their own fuel. All the farmers the government pays not to grow anything could grow these trees. Harvest the leaves make the fuel. At that time they said it would cost around 3 cents a gallon to make. The cost at that time would cost each person around a $100.00 to get their car tunes to run on this fuel. There would be 0 pollution from this fuel. CBS played this story late at night and said before airing it, that it may be the last time anything is ever seen on CBS again. The government and big oil did not want anyone to know about this. Well lets bring back the mans idea and really do something about the earth. You want to help change the world, then lets do the brave thing and stop burring oil. We have the best technology at this time in the world. So lets do something we can all do and get behind.

  68. mnikkel55 says:

    “I know, I’ll get on my bike and commute thirty miles round trip to work. Ass.”

    I find your simple mindedness astonishing. Is riding a bike really the only way you can think of to conserve energy? Since you seem to suffer from a lack of imagination, here are some other options.

    -Use public transportation
    -Carpool
    -Live closer to work
    -Work closer to home
    -Buy a more fuel efficient car
    -Turn off and unplug appliances when not in use
    -Use energy star rated appliances
    -Switch to CFL’s
    -Install better insulation in your home

    Granted, not every all of those are options for most people. However just about anyone should be able to do at least one of those, and everything on that list will save you money while simultaneously helping to lower the price of gasoline and other sources of energy.

    This mindset that there’s nothing any of us can do and that we’re all at the mercy of ‘Big Oil’ earns no sympathy from me.

  69. llanim says:

    “[Oil companies] primary business is exploration.” No it’s not. That may be their primary activity, but their business is maximizing shareholder value and they do that by selling what they extract. If extracting and selling oil produced no profit, they would not be in that business. I’m not saying that is wrong, but let’s not lose sight of their objective.

    People and institutions playing the future’s market, which drives the price of crude, also have no motive beyond profit. They don’t really care what they’re trading.

    Of all the commodities that reach the consumer, the price of oil is the least influenced by supply and CONSUMER demand.

    I spent the last two years working in oil-producing countries in the Middle East, where oil and gas for the local market bypasses the future’s market. The retail price is not subsidized (though it is tax-free) and is sold at a profit. And yet, in two years, the price has stayed steady at around 90 cents per gallon.

  70. maxepad says:

    the reason gas prices are so high is collusive olligopoly(opec). every oil producing country gets together and prices as a group. the price of gas since opec was founded has grown however many thousand percent. however gas processes have remained the same. if any of this happened in the US the offenders would be locked up by the state department. however the us has no juristiction to tell the saudi government and others what to do. all this stuff is a factor but its my oppinion that opec is of equal blame as futures markets

  71. synergy says:

    @kewpiedoll99: Some of those countries with the low prices have large amounts of their own oil. Russia, Saudi Arabia, Kuwait, and Venezuela I believe. I THINK Venezuela has nationalized their oil, so it’s not being worked by a private, for-profit company.

    @virgilstar: I agree with you 100%.

  72. ed-man says:


    @rocnrule: The reason we (including Canadians and Americans) need cheaper fuel than Western Europe or Japan is that we are more spead out. You can pay $7/gal in the UK because the distance between major cities is so much shorter. With 80 million people packed into an area the size of California it does not take much gas to get to places. People in the UK think that because I live in Ohio, I must take weekend trips to NYC all the time. They have no concept of the scale of land area here. This is also why long distance mass transit has failed miserably here. London to Manchester might take 2 hours by train whereas NYC to LA might take 2 days. Therefore, the costs to build and maintain the infrastructure would make the cost of a ticket astronomical.

    As for your National Health Care? That will succeed when people stop flocking over here to self pay for operations that they cannot wait 2 years for. Our health care is expensive, but that is because we have more of it available.

  73. zolielo says:

    @terry-j: Cars can be converted to run off a number of items that are lower priced per output then gasoline. That is not the problem at all. The main impediment is a lack of alternative fuel distribution centers and producers.

  74. brew400 says:

    Baton Rouge LA – $2.98 at race trac
    $3.08 at BP
    $3.18 at chevron

  75. Beware the many forms of the Saudi Arabian butterfly:

    World oil prices jumped briefly on Wednesday after a television station in Tulsa, Oklahoma — the No. 62 U.S. media market — posted an erroneous story about a refinery fire on its Web site.

  76. Tonguetied says:

    @rocnrule:
    If you were off the oil, you would be naked, you wouldn’t have any food in your house, no scratch that you wouldn’t have a house either.
    How do you think the clothes you wear, the food you eat, the stores you shop at are supplied? Magic fairies who wave their wands and make the products appear out of thin air?

  77. Tonguetied says:

    @quiksilver180: Ben Stein’s dad (wish I could remember his name) used to say that if you think a company is making obscene profits then buy stock in that commpany…

    What are the profit margins of oil companies compared to the profit margins of computer companies? to Walmart? to then national average?

  78. Trackback says:

    Given that we’re already spending the GNP of a small nation on weddings, why not include a little Internet video to share those Big Days with the world?

  79. Trackback says:

    There was the one day gasoline boycott, then the month-long boycotts of particular companies (in this case Exxon), but no one really seems to push the most obvious idea of them all – reduce our use of gasoline and our reliance on oil, that will truly hit the oil companies and those darned…

  80. Greenbeard says:

    Americans are dependent on cars. The entire suburban sprawl culture that we have promoted over the last 50 years has insured that.

    While we COULD find an alternative fuel for our method of transport , there isn’t enough ‘pain’ that $4 gas would cause the average person to write their congresspersons to complain and demand some sort of action. (Just like most of the problems in the USA – until 50% of the voting population doesnt like something it wont change…)

    Certainly, we see some companies (like Toyota) moving towards selling products to take advantage of this situation but it is a drop in the bucket at the moment.

    The main problem I have with Gas Prices – like all forms of deregulated energy (wouldn’t you call it that?) – is that there really are not any options for the consumer. There really is not a competitive market for gas despite using all of the market jargon (supply and demand in a cartel?).

    The refineries dictate the price and we pay it. How else could it be that oil companies/refineries make record profits ?

    So, until we gather the political will and realize that energy resources are something that a) needs to be conserved and b) developed for the common good (vs pure profit motive) you should probably buy stock in oil companies to offset the rise in prices(!).

    As energy prices start rising across the board you will see more push towards alternatives: solar, biofuels, etc. but not until there are a lot of peole living in agony because of it.