Feeling Pain at the Pump: The High Cost of Oil and Gas

With gas prices skyrocketing, Americans are starting to question our automobile-based culture and consider carpooling, riding bicycles, and walking. They’re also starting to ask questions like, "Why is this happening?" "Are high gas prices affecting the economy?" and "Is there anything our government can do about it?"

All good questions, and various analysts and economists have come up with some answers. Below is WomenMatter’s explanation and analysis of any consensus.

Why is this happening?

The national average for a gallon of gas is around $2.55, a jump of 68 cents from last year, according to the Energy Department. High gas prices result from an assortment of contributing factors. Clearly, the high price of crude oil (currently around $65 a barrel) causes gasoline to be more expensive, but why is crude oil so expensive right now?

In the United States, demand is up between 2 to 4 percent, and world demand is higher as well. In particular, China, with its booming industrial sector, is using more oil and gas than ever before. Higher demand and lower supply equals higher prices.

Supply is low or perceived to be low because non-OPEC (Organization of Petroleum Exporting Countries) nations like the United States have not been producing much crude oil. And refineries responsible for over 16 percent of the U.S. capacity have recently reported problems or shut-downs due to power failures.

But supply and demand are the only tangible parts of the equation; the rest is as abstract as anxiety and speculation, very powerful forces in determining the price of gas.

Anxiety and speculation

Some say that anxiety over the possibility of a nuclear Iran has oil prices climbing. Analysts fear that Iran will cut back on oil production if tensions increase, and Iran is the second-largest oil producer after Saudi Arabia.

Also, pure speculation over what may happen in the future affects oil prices now. Expectations of higher demand and lower supply keep prices high. Anticipation of greater supply edges prices back.

Some say that the Chinese economy is starting to slow and so the country will need less oil in the near future. Others speculate that prices will drop when summer driving season ends and fewer Americans are taking road trips, causing supply to go up and demand to go down.

But most analysts say that prices will remain above $2 a gallon. And that pleases the highly profitable oil and gas producers and their stockholders.

Are high gas prices affecting the economy?

So far, high gas prices have had little economic impact. The economy is still growing, the job market still improving, and homes remain valuable. High real estate values cause many Americans to save less and spend more -- the last fiscal quarter saw a 2 percent increase in retail sales.

Further, the supply of inexpensive imported goods remains stable, which makes the economy less-vulnerable to oil-based inflation. And intense competition is keeping a lot of companies from passing on higher fuel costs to customers, though industries that are travel-based, like the airline industry, have little choice. Airline tickets have gone up about 7 percent as a result of higher fuel costs. Overall, consumer prices increased 0.5 percent from June to July.

But analysts are calling the economy "more tolerant" of higher energy costs, since it takes less energy to produce goods than it did thirty years ago. However, economists warn that high fuel costs will eventually limit economic growth.

Some say the economy is already showing signs of strain. Wal-Mart reported low profits for the last quarter, citing high oil prices as the cause. And many Americans say that paying more at the pump is causing them to spend less everywhere else and to save less.

Is there anything the government can do about it?

In the short run, there is very little the White House or Congress can do to reduce gas prices significantly. However, the government could set more stringent fuel efficiency standards that would increase supply and help bring prices down in the long run. The administration does not want to slow down the use of SUV’s because American car manufacturers are already in difficulty.

Some say the government should set price caps, but the White House is reticent about interfering with market forces.

The U.S. does have the Strategic Petroleum Reserve (SPR), which contains nearly 700 million barrels of oil that could provide about 4 million barrels a day, about a fifth of the daily demand. Some Democrats in Congress have urged Bush to use the SPR oil to try to ease prices. The Bush administration says the oil is to be used only in response to a disruption of imports.

The recently passed energy bill does little to curb current oil and gas prices. The new law provides the country with incentives to develop more diversified energy sources such as nuclear power, clean coal technology and renewable energy like wind power, but the bill does little about the current demand for oil, especially in transportation.

Do you think the energy bill should have focused on lowering gas prices? Do you consider the current fuel situation a crisis? How have high fuel costs affected your family?

What do you think?

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Article Posted on: 8/20/2005