Why Was Gas So 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 were near $5 a gallon until falling 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…

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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.

RELATED:
What Goes Into The Price Of Gas?
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)

Editor’s Note: This post was originally published May 2007. I decided to republish it now because it’s one of my favorite posts Carey ever did, and it’s incredibly relevant in the current economic situation.

Comments

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  1. HogwartsAlum says:

    I paid $2.59 a gallon this weekend. Gee, it was nice to see a “2″ in the price again. Whee! :D

  2. StankGunner says:

    gas has gotten down to about 2.70 in Indianapolis, which is pretty fantastic.

    • APFPilot says:

      @StankGunner: just in time for me to go back to 3.20+ back in florida, at least it gives me something to look forward to.

    • zlionsfan says:

      @StankGunner: There are places cheaper than that, some considerably so … one of my coworkers saw it at $2.57. Looking here, I’d guess it was somewhere pretty far south.

      It’s not like the entire city is like that, though. I have a 25-30 mile drive to work, and I’d guess the prices I see on my way vary by 30 cents or more … I’ve driven past the BP at the top of that list before ($3.29, which is insane when you consider what else is available on the north side).

  3. AtomicPlayboy says:

    Gas costs $5/gal because people will pay $5 for a gallon of gas and consume it at a rate that makes this profitable for all concerned parties.

    • Traveshamockery says:

      @AtomicPlayboy: Actually, gas no longer costs $5 a gallon because people WOULDN’T pay $5 for a gallon, and therefore consumed at a lower rate.

      Let’s hope $3/gal isn’t the new $2/gal for people. Unfortunately, it’s almost certain that as a culture, we’ll abandon our newfound gas frugality and start driving like maniacs again :(

      • AtomicPlayboy says:

        @InfiniTrent: Yeah, I was making a general point (which your response further supports), not one specifically tied to the $5 rate. Restated:

        Gas costs $/gal because people will pay $ for a gallon of gas and consume it at a rate that makes this profitable for all concerned parties.

        • Traveshamockery says:

          @AtomicPlayboy: :) True.

          Obviously, there’s a floor that the price won’t drop under, but it’s interesting what a mere 5-8% decrease in consumption did to the price!

    • Michael Belisle says:

      @AtomicPlayboy: Your answer to the question is like saying that the sky is blue because the chemicals that air comprises are blue. It’s technically true, but that doesn’t really answer the implied question here: What is the specific process by which the price of gas is determined?

      It’s not like they just query the infinite knowledge of the Free-Market-O-Tron 9000 (and it prints out a little slip of paper that says “Today’s profit-maximizing price in Poughkeepsie, NY is $4.76/gallon. p.s. Your lucky numbers are 23, 16, 54, 36, 12.”)

      There is a specific process by which they determine what price so that people “consume it at a rate that makes this profitable for all concerned parties”. That’s what this article attempts to explain.

      (But on the other hand, Treasury explained how they arrived at $700 billion by saying “It’s not based on any particular data point. We just wanted to choose a really large number.” Apparently some things are that magical.)

    • Kelleah says:

      @AtomicPlayboy: I love it when hipsters come out of the woodwork to blame the victim. It’s not the greed of major oil companies conspiring with a corrupt government administration and the auto industry that’s causing high gas prices.

      No, the American public is to blame. How dare they continue to drive to work, pick their kids up from football practice, drop their little ones off at daycare, go grocery shopping, visit family members, treat themselves to a minute outside of the house that doesn’t involve running errands or going to work. Yeah, Americans are stupid. It’s their fault the gas prices went up. Yep, that’s it.

      • AtomicPlayboy says:

        @Kelleah: If by “hipster” you mean someone with a modicum of knowledge about economics, and someone lacking a reactionary antipathy toward corporations, then I suppose I fit your description. To characterize the demand side of the supply-and-demand equation underpinning market pricing as “victims” belies any subjectivity on your part, as does your use of the word “blame” here. The American penchant for 12mpg SUVs over the last decade, combined with our love (and necessity) for personal automobiles, has demonstrated very clearly that we collectively have had little interest in lowering demand for gasoline. That’s not “stupid”, but it is a choice with repercussions.

        Yes, the corporations and their government enablers do as much as they can to maximize profits, but to simply discount the consumer’s role in the price of gasoline out of some simplistic sense of fairness is rather ignorant (it also seems to me to be the “hip” argument these days). I will spare you the Econ 101 explanation of how this works, but you should Google it before you attempt to contribute to the discussion next time.

  4. thelushie says:

    We are at $3.29 a gallon, a 70 cent drop. It isn’t great but it is better than what it has been.

    • Git Em SteveDave loves this guy--> says:

      @thelushie: Ouch. In Jersey we’re at 2.89 and we have it pumped into our cars.

      • thelushie says:

        @Git Em SteveDave loves this guy–>: I get mine pumped for me if I don’t feel like getting out of my car…but then I add a tip. We always run higher than everyone else. I guess I could go to Kentucky and pay a better price…but then I have to factor in wear on the car, gas, etc. (It is about a 30 minute drive)

        • Sidecutter says:

          @thelushie: Depends on where you go. There’s been some hullabaloo lately because our area here in Louisville has been running a consistent $0.15-$0.30 higher than all the surrounding towns and cities for no good reason for a good while.

  5. Traveshamockery says:

    Great article – I skimmed, and I’ll go back and read in-depth later.

  6. junip says:

    This is why I live in the city and don’t own a car. I would like to move back to my home town and settle in there, but I’d rather wait for greener cars with better mileage to be affordable and widely available.

    • downwithmonstercable says:

      @junip: The problem is beyond driving a car though, this is one of the root causes of the shrink ray, among other things.

      • junip says:

        @downwithmonstercable: Yah, but the shrink ray is harder to avoid. The gas pump is easier.
        Some of the store-branded items in my local safeway have either avoided the shrink ray, or have taken longer to shrink the product than the name brands have, which is a plus.
        I feel really bad for the people who live in cold climates this winter too. Lucky me, I live in a very temperate climate.

  7. KyleOrton says:

    Thank goodness prices are coming down. Now I can buy the heavy duty pickup and ski boat I deserve!

  8. charlie.evans says:

    When I looked a couple days ago, it was $2.69 here. God I love living in OK

    • Andon says:

      @charlie.evans: Yeah, I think I got it for $2.39 up here in Edmond over the weekend. Hey, does anyone else remember when you could fill up with a ten dollar bill, and still get a buck or two back in change? And that was in 2001.

  9. JohnDeere says:

    its funny how they got us believing 2.50 is cheap. when its less than 2 then it will be cheap. (not really but better)

  10. Starfury says:

    The ‘cheap’ station here is at $3.42/gallon.

    Still high but better.

  11. Shenanigans Was Taken says:

    I swear I have read this exact same article before. Maybe on Jalopnik?

  12. Triborough says:

    A better question is why is gas so much cheaper in New Jersey, where full service is mandated by law.

    • edicius is an acquired taste says:

      @Triborough: Good question. In Morris County, I’ve been seeing more and more stations in the $2.80 – $2.90 range.

    • mbz32190 says:

      @Triborough: They have insanely low gas taxes (or maybe none at all, but I’m not too certain in that area).

    • ManiacDan says:

      @Triborough: It’s also cheaper because the station owner doesn’t have to pay for the destruction to the pumps by random morons. A station not far from my house just got an entire pump destroyed when someone drove off with the hose still in their car (the quick release valve…didn’t). On a full-service station, that kind of thing doesn’t happen.

    • silver-bolt says:

      @Triborough: Low Gas costs, high volume per area, and local refineries.

    • bmoredlj says:

      @Triborough: Not being allowed to pump your own gas is UNAMERICAN.

      If you have the IQ to operate a machine as dangerous as a car, surely you can operate a gas pump.

      Heck, I’ve done it hundreds of times, and I haven’t blown up a gas station…not once!

    • TVarmy says:

      @Triborough: We have a ton of refineries, are close to where the crude comes in from overseas, and we also manufacture many of the additives locally. Plus, we sell a higher volume of gas because of population density. Also, apparently full-service is just a drop in the bucket compared to the other expenses. The number I hear is two to three cents more per gallon to have someone pump it for you.

      I agree that it’s not exactly hard to pump a gas tank, but it is convenient to not have to get out of the car, and it’s usually faster because the guy pumping the gas knows how to mess with the touchscreen better than I do. Pardon the pun, but YMMV.

  13. mbd says:

    Gas is cheaper here in New Jersey partially because many of the east coast refineries are located here, and mostly because our gas tax is much less than surrounding states.

  14. Nighthawke says:

    They just went hog wild on the futures market – $77.70BBL
    Some are singing praises and saying $50 by the end of the week.

    The Iranians and the Venezuelans are calling for cuts in production like NOW, but the Saudis are standing pat.

  15. TracyHamandEggs says:

    When I paid $2.99 this weekend I called all my family and friends I was so excited. Honestly though, I don’t want it to fall to far. the changes that people and businesses are making won’t continue if it gets too cheap, and we need to conserve.

    I know a number of companies that decided that at $3.50 a gallon they were better off going to a hybrid fleet. If it drops too far they will lose money on the deal and be less likely to make positive changes in the future.

    • Triterion says:

      @TracyHamandEggs!: Yeah, I keep thinking that the rising prices had somehow been all a result of some secret hippie-tree-hugger organization set on driving the price so high that we all stop using Dino-juice and their green-Utopian paradise could finally be realized!

  16. mac-phisto says:

    we just broke $3 here & to be honest, i’m pretty comfortable with that. i know this is going to be an unpopular opinion, but i’ve enjoyed the noticeably lesser traffic that occurred with the spike this summer.

    if prices continue to drop, i fear that many of the conservation tricks we learned this summer – grouping tasks into one trip, ride sharing, mass transit, biking & walking a little farther – are going to be forgotten.

    as much as i’d enjoy filling my tank up for $10-15 less, i’d rather see us all be a little more responsible with our gas consumption. those 2 things don’t necessarily conflict with each other, but cheap gas breeds bad habits.

  17. Traveshamockery says:

    Now I’m just enjoying the sour looks of all the new Prius owners who took on a $25,000 car payment just to save some $$$ on gas.

    /bitter 1998 V6 Chevy Lumina Driver

  18. RhodaEnceladus says:

    The price of oil is reportedly the lowest it has been in a year. But I remember paying $2.18 a gallon in Feb. 2008 in New Jersey. Today’s gas price is still .60 Cents higher. While I appreciate the lower price I cannot understand why people thinks this is ‘Fantastic’.

    • tandonmiir says:

      @RhodaEnceladus: Remember Orwell’s 1984?

      Winston is watching the telescreen, and it announces that the chocolate ration has been increased to 20 grams a week, whereas yesterday it was cut down to 20 grams a week.

      People think it’s fantastic because they were paying more. It’s that simple.

  19. wcnghj says:

    Just paid $2.89.

  20. ai2tis says:

    I guess my comment will be banned because this blog is mainly American. But the truth sometimes hurts.
    I can’t believe. $5 a gallon?? So freaking cheap?? :D
    Ok, I was born in Lithuania. It’s small country in Eastern Europe. But $5 a gallon? We had such a cheap gas price probably 5 years ago. I just checked it now. It went down a little bit.. now its $6.24 per gallon.
    2 years ago gas price was maybe few cents lower. I was a student. I was driving 30min. to work and back everyday. Usually long trips on the weekends etc. And at that time I didn’t thing gas price was expensive. It was not cheap, but not expensive either. (Btw my income was quite low at that time).
    Now just bare with me and take into account that average salary in USA is 3 times bigger than in Lithuania. OK, lets just lets say that Americans are bitching when gas price reaches $4 per gallon and goes crazy when gas price reaches $5 per gallon. And an average East European thinks that you can live with the gas price of ~$18 per gallon and if the gas price drops down to $15 per gallon it’s just normal price. (take into account that people in USA earn 3 times more then in Eastern Europe, so that’s why I put the price $18.
    Just for information I want to put down my car statistics. Few years ago I had an old car honda civic of 1994.
    3.87 gallon per 100miles in town
    and
    2.81 gallon per 100miles in highway.

    Ok, so now people. Americans, please explain for me how come you bitch and whine so much about gas prices going up to $5??? I understand it’s can look not fair and hard when you see some item or service price going up by x2!!! That LOOKS like a disaster. Sure it looks expensive. But is it really so not affordable??
    At school for few years I had an English teacher from New York. He was born in USA. And he was ~24-26 years old at that time. From his stories I understand that a car for American people is like symbol of freedom. That no one is ever going to buy groceries without a car (there no ever a question about that), even if you visit your friend 200 metres away from your house, people still take car. Do you really need that??

    I think all this fuss is not in a rising gas prices. It’s more based in an inner feeling that you might have to change your driving behaver, which might feel like loosing of freedom??
    Personally I don’t think you loose freedom if you walk small distances instead of driving car.
    I don’t think you loose freedom if sometimes you take a bike instead of a car.
    I don’t think you loose freedom if on rare occasions you take bus instead of driving a car.
    I don’t think you loose freedom if you don’t buy a new car every 2-3 years.
    Hmmmm.. maybe I’m wrong.

    Just think about it.

    Peace.

    Aidas

    • adamondi says:

      @ai2tis: Maybe you are right about some things, but you need to understand the vast differences in size and public transportation infrastructure in the States versus Europe. There are many times when there simply is no option available to many Americans other than driving, because we have shoddy rail and bus service outside of major cities. Even within many major cities, public transit is a joke.

      So while it might be nice to say, “Hey, take a bus or ride a bike to work instead of driving,” I would love to see you try to ride a bike the 35 miles each way that I have to drive in to work from my house, because there was no affordable housing any closer than that to my office. Or, alternatively, I would like to see you spend the 2.5 hours each way on the bus that it would take me to make that same trip.

      So feel free to get off your high horse and think about the geographical and infrastructural differences between our countries before you go off on how much we complain about gas prices.

      • ai2tis says:

        @adamondi: That’s the think. I want to discuss about this issue.
        I’m not on a high horse mate. :)

        Ok, I’ll take into account USA infrastructure. But the thing is. I know a lot of people who drive a car for an hour just to reach their work place. And even they don’t complain about gas prices. They wanted a well paid job with an affordable house outside the main city center. They’ve done that. It was their choice.

        As for “Hey, take a bus or ride a bike to work instead of driving”. I didn’t say such thing on purpose, because I know that there are quite a lot of people who drive a long distances to work.

        I personally was working as a real estate agent for around 6 months. At that time I was basically “living” in a car. Company didn’t have policy which would compensate for the gas. And even at that time I was paying Around $6.24 per gallon. I didn’t think that gas was expensive.. It was simply affordable. Still keep in mind that salaries are much lower in Easter Europe.

        • donnied701 says:

          @ai2tis: You keep saying that salaries are much lower in Eastern Europe compared to the US. I know that if I worked for the US minimum wage, and had to fill my tank once a week to get to work, I’d be spending around 30% of my weekly pay on fuel alone. Is that a a good wage comparison between the US and Eastern Europe?

          • ai2tis says:

            @donnied701: Yes it’s good comparison. Because if you would earn minimum wage in Eastern Europe there is no way you would be able to afford car expenses and gas at all.

            If you are on minimum wage in Lithuania, you would get paid around $240/month after tax.
            But of course like in USA, in Lithuania also most of the people who live in towns and cities get paid more than minimum wage.

    • silver-bolt says:

      @ai2tis: Take a standard minimum wage (Say federal) 6.55 per hour, full time 40 hours, before taxes is 262 dollars a week. After taxes (No state, no deductions, just federal etc) you have 227 dollars. x 4.5 for the month and you have 1027 dollars that month.

      Now, pay housing (600 for a small studio in urban areas), insurance (I pay 200 for basic coverage for a 1999 import car), food, medical, energy, and water (This isn’t including any non essential like cable or internet or fancy restaurants or movies or anything fun), and yes, 5 dollars a gallon is expensive.

      • ai2tis says:

        @silver-bolt: Let’s not take standard minimum wage, because majority people earn more or much more then minimum wage. Don’t you agree?

        • Kelleah says:

          @ai2tis: No, actually, most Americans don’t make much more than minimum wage. That’s what happens when the majority of your assumed notions of Americans comes from TV and film. Most Americans live hand-to-mouth, paycheck-to-paycheck with massive amounts of debt.

          You claim you’re not delivering your sermon from your sanctified high-horse, but that’s exactly what you’re doing. You’re certain you know what’s best for 301 million people, but you don’t even know how those 301 million live day-in and day-out.

          • ai2tis says:

            @Kelleah:
            National average wage
            [www.ssa.gov]

            date of year 2006 says – 38,651.41

            If you are saying that most Americans don’t make much more that minimum wage. Is it really true that more then 50% of people in america are getting around $7/hour? Somehow I don’t think it’s true. Please correct me where I’m wrong.

    • silver-bolt says:

      @ai2tis: So, how much is your average pay, and your average expenses?

      Also, consider that most people don’t have cars that give them 34 or 35 miles per gallon like you do.

      • ai2tis says:

        @silver-bolt: I don’t live in Lithuania atm. But year and a half ago, my average salary was $600-700/month. after tax. Now I probably would be able to get $800/month for the same job.

        At that time I had these expenses:
        $180/month – food
        $22/month – high speed internet
        $160/month – for rent (i was renting a room in a flat at that moment. I’ve got it super cheap)
        If I would like to rent a whole single room flat in a quite old house for myself I would have to pay at least $300/month + expenses like water, electricity etc.
        If I would like to rent average looking single bedroom flat i would have to pay at least $600/month + expenses.
        $40/month – gym membership
        $120/year – car insurance
        ~$150/month – for gas. Usually I was driving around 750 miles per month. Sometimes I was spending much more if I had some additional money.

      • ai2tis says:

        @silver-bolt: and btw. “consider that most people don’t have cars that give them 34 or 35 miles per gallon like you do.”
        There is no excuse to have a car which uses much more gas per mile. If someone buys a car which runs on 5-6 gallons per 100 miles what is a persons choice. They are probably a racers or just rich people.
        I think USA is a free country and you can buy a car of your choice.

    • Triterion says:

      @ai2tis: I think people complain because the layout of America was designed with cars in mind so that you can not realistically walk anywhere unless you live in the downtown area of a major metropolitan city. In most suburbs even- it’s almost 3 miles just to reach the nearest convenience store, let alone anything else. It’s so nice living in an area that has shops all around that you can walk to, but unfortunately we don’t all live in little towns with a butcher, baker and a candlestick maker on every corner :(

      • ai2tis says:

        @Triterion: Each. I understand you. The same thing in Lithuania. If you live in a city or town. It’s ok, you can reach your grocery store just by walking. If you live in rural area, that’s a problem. I guess the difference is that in USA you have more people who live far from work or shops.

        I understand that there are people who can’t change their driving habits, those who live far from work, stores etc. But I don’t think that I would be wrong by saying that there are a lot of Americans who simply don’t want to change their driving habits. There are a lot of people in USA who just feel a need to buy a new car every 2-3 years. I’m talking about people who drive even in downtown area for 40min. when they can reach their destination point by just having a nice 50min. walk.

    • motojen says:

      @ai2tis: Give me some high speed rail here on the West Coast and I’ll let my car sit in my driveway more often than not. For now the hour and a half drive each way I have to make to get anything decent (yes I live in the middle of nowhere)means 5 bucks a gallon hurts like hell. I own two bikes and enjoy a walk as much as the next person but I have my limits. 1 mile or less if I have to carry stuff and up to three if I’m empty handed. Beyond that it’s time to burn some fossil fuel. I do understand what you’re saying though.

      • ai2tis says:

        @motojen: I understand you mate :)
        One thing which I mentioned before is. I still can’t understand why on Earth so many Americans are buying totally gas inefficient cars. Do people laugh at you if you have not very powerful car? just interested

    • cluberti says:

      @ai2tis: Well, I can’t speak to what most Americans drive, because I’m just one American. I have to have a large (and by connotation, fuel-inefficient) vehicle as I need the space for my son’s medical equipment and such. I know my neighbors use their Ford Explorer to haul their 4 kids (everywhere, they’re all in middle and high school and very active).

      So, yes, $5/gal hurts me because I have NO choices but bad ones due to our situation. I would buy a hybrid, but I’d spend much more and get very little gas usage back in return. I can’t use public transport (even if it did exist here, which it doesn’t) either.

    • Witera33it says:

      @ai2tis: I will say it again. Higher gas prices will force people in the US to rethink their lifestyle choices.
      I know that gas prices in europe are very high. European countries have much better public transportation funded by the taxes applied to gas. We could be doing that here in the States. People are also more excessive about alot of things here in the States. I know I am. Rethinking spending habits, food choices, housing choices, all relate to the prices of getting around. Maybe if we found ways to need a car less, eat more seasonally with less meat, moved closer to work(and put the pressure on to improve education, so that your kids don’t suffer) the prices wouldn’t matter as much.
      At least that is what i get from the OP.

  21. What Would Kornheiser Do? says:

    So how many fucking butterflies flew over the Middle East this year? Seems to me we had $5 for more than just a few days, so hopefully you’re using days as a metaphor.

    Also, when will people ever realize gas always jumps way up during the summer, then drops again come autumn? Seems like no one is ever able to figure it out…

  22. Invective says:

    Believe it, or not, there is a whole lot of information missing from the above article. I understand the desire to explain things and do some good, but really Gas and oil is not that hard, or that complex. It only *seems* that way to some. (Maybe most, I never took a pole.) Information like who the players are, or that oil companies setup subsidiaries for manipulating the market. Information like how most of the market manipulation is kept secret to benifit the oil companies. If you remember Enron, really you can break it down just like what they did. Power companies actually are still doing what Enron did, but because just about everyone and their Mother is bought off that might have influence in the industry, we all buy their rhetoric and then some. Going so far as to repeat the marketing division’s mantra, “Oil Prices Will Never Go Down Again!” Oooo. Now we look like we know something. If someone else repeats it, then we really look like we know what we’re talking about.
    All you need to know is a couple of things. 1st is that the oil companies and power companies operate in a false market. A market setup to look complex to that average schmuck not willing to do the research. Second that oil and power companies manipulate that market to keep profits up. This last burst of raised gas prices was not because of actual Futures market trading, or the flapping of locust wings, it’s because oil companies wanted to secure future profits by opening up restricted drilling. Try watching C-Span and you’ll get it. Most people don’t, like most people have no clue if their bank is about to fail or not. They just ‘hope’ it doesn’t. The rest is all politics and corruption. What needs to happen is Fuel Cells and put an end to the ‘Grid’. I’m a long time ‘off roader’, but I’d gladly give up all that for an electric car that goes at least 100 miles, rather than pay another dime to oil, gas, or power companies. (I did see an all electric off road motorcycle inside a magazine recently…)

  23. ThatRandomGuy says:

    I saw gas for $2.99 today. I was shocked

  24. zentex says:

    mmm Deja Vu! is this a recycled post from the past?

    Sure looks like it.

  25. parsonsdj1 says:

    I’m English, but I’ve lived here for a decade and recently became a U.S. Citizen. I knew that I was really American the first time I complained about the price of gas over here, when it nipped above $4 a while back. I had a timely reminder not to be a little thankful for small blessings recently when I took a trip back to England and paid close to $10 a gallon. I wouldn’t be driving my pickup truck back home, that’s for sure.

  26. yertle says:

    Good article, interesting read.

  27. Confusion.Bomb says:

    “Branded gas from Exxon-Mobile, BP-Amoco, etc, isn’t different from the unbranded gas found at Joe Schmoe’s Gas Shack”

    Wrong. Refined gasoline that goes to each gas station is apples to apples. The difference bewteen various gas “brands” is the chemical addative package they mix into their base stock. The reason bargain gas is a dime or so cheaper per gallon isn’t that they have a inside deal or a better purchasing agent, it’s that they sell a gasoline that only meets minimum standards.

  28. Squeezer99 says:

    FTA “Eliminating those taxes would reduce the price of gas by a few cents”

    more like 44 cents, i hardly call that a “few” cents

  29. G-Dog says:

    I hate hearing people complain about how much money their Jet Ski’s, ATV’s, and Snowmobiles cost to run, and honestly think it’s the governments job to keep their hobbies cheap.

  30. roshambo says:

    The station down the street from me is still at $3.59. It disgusts me to see people saything they are getting gas for a dollar less than that. If this isn’t price gouging I don’t know what is. I wish the Government cared and went after these companies. I was looking earlier today for gas prices and in September of last year when a barrel of oil was around where it was now, gas was under $2.90 a gallon. Things just don’t add up and it frustrates me. Sadly I work a job that I drive all over and don’t have any other options.

    • Powerlurker says:

      @roshambo:

      A large part of that is most likely because of different taxes or esoteric blends required by your state. A large part of the reason why gas in NJ is so cheap even though they have mandatory full service is because they have either the second or third lowest gas tax in the US (although having a few major refineries in the state doesn’t hurt either).

  31. Altdotweb says:

    High gas prices before a major election = many mad voters.

    Gas prices will rise again in late November.

  32. quail says:

    Interesting read. But I’m curious as to what went into the quick price drop. Why did it drop so quickly in 1 week? Was it more than the supply and demand equation at work with the price these past few years?

    A few armchair pundits and I wonder if the freeze in credit has kept speculators out of the production chain and if the current pricing isn’t more realistic. I’m not saying that there was price gouging, but the oil market must have been heating up too like the real estate market once was and the dot coms before that.

    Curious as to what people’s opinions are…

    (Yes, I know gas is reformulated in the summer in most of the country to a more expensive form and is part of the reason for the drop. I also know that we were once assured by our government that speculators are kept out of the oil market… but still I wonder.)

    • TracyHamandEggs says:

      @quail: After the Hurricanes decimated refinary production we say the end-of-summer price drop not materialize like it usually does, instead seeing a price spike. Once production was back up to full speed we benefited from the full September/October drop we normally get all at once, along with lower oil prices. So basically we say 6 weeks of lower prices slamming at once.

      Its why prices are still high in some place. The pipeline hasnt reached out to those areas, or they havent had a new shipment since the drops.

    • Powerlurker says:

      @quail:

      I think part of it is that speculators figured that the price elasticity of demand for gasoline was lower than it actually turned out to be. In other words people figured that Americans would basically suck it up and pay more for gas rather than changing their consumption patterns. When that assumption proved false, prices dropped.

  33. INsano says:

    “At the turn of the 20th century, the U.S. had just under 175,000 gas stations.”

    -Really? I had no idea there were so many gas stations in 1900…the turn of the 20th century…

    Am I really the only person who read this that knows what century we’re in?!?

  34. banmojo says:

    Monopolies control cost with an iron hand, has always been the case. Government either stops monopolies with an iron hand, or reaches out with greedy hand and gets kickback. Human nature dictates 2nd option most often taken, which is why government must have system in which kickback is not even an option, which is possible. Our US government, as great as it is, has much much which can be improved, easily and quickly in fact. But politicians, those lying greedy sacks of dog feces that they are (on ALL sides people) would rather risk revolution than give up their finite amount of power which they hold for a finite amount of time.

    You WILL answer to an infinite God, and face an INFINITE judgement. Justice WILL be had in the end of time as we know it. Mark my words.

  35. crashfrog says:

    I don’t understand how gas prices can be related to the high market cost of crude when most of the major gas and oil companies do their own exploration and pumping in-house.

    Are they selling their crude, then buying it back? If it’s all internal, shouldn’t the price of crude be just the costs associated with its extraction?

  36. sam-i-am says:

    Why does the title use the word “was?”

  37. B1663R says:

    Damn Butterflies…

  38. AlexandraCurvus says:

    The next time you see a moron, alone, in an SUV. Wave to him with the 1 finger salute

  39. MrEvil says:

    I think the big thing in the article that points out why oil prices skyrocket. 5 billion barrels traded and only 31,000 delivered over a SEVEN YEAR PERIOD on the futures market!

    Easy way to nip that in the butt would be to require that you can’t sell something until you’ve taken delivery.

    Buying something you’re not going to use, just to sit on it and resell later at a higher price is artificial demand.

  40. El_Guapo says:

    This is why I love The Consumerist. Great article.

  41. AlmetaCorvinus says:

    The “American Mercantile Exchange?” I’m pretty sure such a thing does not actually exist.

    Crude, gasoline, heating oil, natural gas, and a bunch of other energies are all traded on the NYMEX, the New York Mercantile Exchange.

    A lot of otherwise mostly-right info in that article, though.

  42. Zephyr7 says:

    Butterflies are assholes

  43. Meathamper says:

    I take the NY Subway, like any other sane person (and there’s a lot of them)

  44. AustinZodiac says:

    The local station pulls another trick. Every time it has the lowest price among the nearby gas stations, it’s credit card machine suddenly stops working.

  45. Anonymous says:

    I agree with the Europeans; Americans bitch too much about gas prices. It is relatively inexpensive and not our life’s blood. We don’t NEED it. No one does. We do, however, need a method to power our stuff. It may be oil, gas, or something else. Like quite a few people already said, if gasoline becomes too inexpensive, people will waste and/or just count on it always being available for their “pleasure.” Ok, so gas went up $2.00 or so in 5 or six years. How much did bread go up? How about cheese? Ever think why your cable went up so high (it quintupled in less than 3 years). How about firewood? Everyone assumes that gas prices are the cure-all or doom of all our problems. They need to look deeper. Has your paycheck increased? The minimum wage in the US was about $2.40 in 1982. The minimum wage is now at about $6.00. On the gas side…. gasoline was about $1.20 in 1982. The price now is still under $5.00. So, what did you do with all that money???
    Why complain about it; accept it as a fact. Everything goes up. Corporate America needs to have larger profits ALWAYS. They’re to blame for inflation, not just oil companies.