General Question

xgunther's avatar

Why are fuel prices out of control?

Asked by xgunther (446points) May 22nd, 2008

It seems to me like we keep hearing about fuel prices reaching all time highs. But, I never hear any good explanations as to why they are climbing so radically. Can anyone break it down for me? And why isn’t anybody seriously demanding change? I feel like rioting and protesting. I can barely afford food and rent every month because all my money goes into my tank.

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14 Answers

MisterBlueSky85's avatar

It seems like a good response to your question might involve a few suggestions on how to save money during this fuel spike. After all, prices are only going to go higher and simply understanding it won’t help your financial situation, right?

A few things you might consider:

1) Open up a fuel savings credit card. The BP gas one apparently was voted best gas card two years running now, but try to get one at your favorite station. Around here, BP is pretty expensive, so I’d open up something else instead. Do some research.
http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/AreGasRebateCreditCardsGoodDeal.aspx
http://www.creditcards.com/gas-cards.php

2) Look for fuel savings elsewhere. Some grocery stores have offered “gas money” if you spend enough on groceries. Other gas stations say if you spend enough on gas, you get a discount on something else (car washes, oil changes, etc.) Consider these offers when you need to fill up – that way you’ll stretch your dollar as far as possible.

3) Consider how to drive the most efficiently with YOUR car. Last week I learned that with most small cars, it’s more fuel efficient to use air conditioning on the highway because of the drag you’d create if you open the window. Check out other tips here:
http://www.edmunds.com/reviews/list/top10/103164/article.html

That’s not an exhaustive list, but it should help. Good luck in hard times.

buster's avatar

its a plot by the scooter and bicycle unions.

8lightminutesaway's avatar

Fuel prices are in total control, they’re consistently going up. “out of control” implies they’re all over the place and no one can predict what will happen. I predict a gas price increase by next month. :P

Spargett's avatar

Because Americans lack backbones, therefor the ability to stand up for themselves.

btw. Oil companies have been reporting record breaking profits in the billions as prices climb.

jrpowell's avatar

Most of the large oil companies have merged. There isn’t nearly as much competition as there once was. There are only a few major players now and there is certainly collusion. But that is illegal so the will just call it “spontaneous collusion.”

And that is a simplification. The energy market is complicated.

And take a look at Coke and Pepsi. The two major players in the soft drink industry and the products cost about the same. But I can pick up a can of Safeway Select that taste just about the same as Pepsi for a third of the price.

The Coke/Pepsi oligopoly colludes (spontaneously?) on the price. Just not officially, because that would be illegal. They agree to price things higher then they should and compete through advertising.

vbarton24's avatar

I think there going up because of the supposed war and the current holiday

indicatebound's avatar

Ok Spargetti and Johnpowell are not on the right track.

Gas prices are so high because of very basic supply and demand.

1) Gasoline is made from oil. Oil comes from a number of places, the vast majority of which are not in America.

2) American oil companies are publicly traded companies. You or I can buy stock in Exxon-Mobil if we so desire. If we had enough money, we could buy the majority of stock in Exxon-Mobil and appoint a director to the company’s Board, in order to get it to do as we wished. Likewise, Royal Dutch Shell, a British-Dutch company, or BP, a British company (formerly state-owned) are publicly traded. Public companies control 15% of the worldwide oil reserves. This includes oil fields in the Gulf of Mexico and various interests in Nigeria, Iraq, Kazahkstan, Afghanistan, Azeribajan and many other places.

3) State-owned oil companies control 85% of the world’s oil resources. Saudi Arabia’s Aramco is owned by the government of Saudi Arabia. You cannot buy stock, nor can any Saudi. Likewise, Venezuela has in the last 5 year “privatized” its oil industry, meaning the government forced the company to become a private state-owned company. Russia did the same thing with Yukos. It forced Yukos to sell all of its equipment to Rosneft, the Russian state oil and gas (natural gas) company. Iran’s government controls its oil reserves and oil company. As does Mexico.

4) Thus, while Exxon-Mobil, BP, Shell, and such are huge multinationals compared to even other huge multinationals, like Coca-cola, they are tiny compared to the state oil company of Saudi Arabia or Venezuela. The U.S. government allowed Exxon and Mobil to merge because it knew that independently Exxon and Mobil were too small to even compete with large players like Aramco. In case, I haven’t been clear: state-owned oil companies are all too happy to sell their oil to the United States. Saudi Arabia has far more oil than they know what to do with right now.

5) There is a certain capacity to how much oil can be pumped on a daily basis. And it depends on very tangible things. The number of oil derricks, oil rigs, tankers, refineries, etc. Right now, the demand for oil is rising faster than the pumping capacity. China is using a huge amount of oil, as is India. The United States is actually using considerably less than it used to (because manufacturing that was done here is now done in China and India). As the demand for fixed supply of something rises, the cost that buyers are willing to pay for that thing also rises. This is why the price of a barrel of oil rose from $35/barrel 5 years ago to $135 today.

6) The per barrel cost is an average. Or the cost for light-sweet. Actual types of oil cost slightly different. Oil that is Light and Sweet is very nice, Dark and Bitter is not so nice because it requires much more expensive refining. Newer sources of oil (Canada’s tar fields) are tending to yield the type of oil that requires extensive and expensive refining.

7) The United States hasn’t built a new refinery since the 1970s. This is a big problem. You cannot turn oil into gasoline without refineries. But it’s a dirty, polluting process and Texas doesn’t really want any more refineries. Do you want a big polluting plant in your backyard?

8) Because there isn’t very much oil in the ground in the U.S. (in the Gulf), U.S. oil companies actually buy oil from other companies, refine it here, and sell it as gasoline. This adds the costs of the middleman – however it is a small cost. But they are buying oil from OPEC. OPEC stands for “Oil Producing and Exporting Countries.” It is a consortium of oil producing nations. The amount of oil produced by a country corresponds to how large of a voice that country has in the OPEC governing body. Hence, Arab countries yield a lot more power than African countries. OPEC sets total for how much oil a certain country will produce in each year. If it thinks the global price per barrel is too low, it will produce less oil (less supply for fixed demand raises price), if it thinks price per barrel is too high, it will produce more oil (more supply for fixed demand lowers price). Recently there has been a lot of division in OPEC because places like Nigeria want OPEC to produce more because Nigeria is quite poor country and it wants to take advantage of the high price of oil. The Arab states disagree though and want to keep production as it is. In the middle nineties, the price of oil fell to $20 a barrel and those countries suffered terribly. It fell so low because it had been so high in the 70s and 80s and they increased production too much. The Arab states remember this and do not want to make the same mistake again.

8.1*) OPEC isn’t necessarily what it used to be. It controls maybe 40% of reserves. Problem with that number and the previous 15/85% numbers is that no one knows how much oil Saudia Arabia has. Today, places like Russia and Venezuela are non-OPEC and are major oil producers.

9) The CEOs of oil companies make enormous amounts of money. 2–10 million dollars + bonuses. Condemn them all you want. But these guys run businesses with multi-multi-billion market capitalization, they deserve to make almost as much as a professional athlete.

10) Oil companies have been making record profits. This is actually good. For the 15% of the oil reserves controlled publicly, it is a good thing to have the oil companies be profitable. If Exxon-Mobil makes $500 million in profits, what do you think it does with that money? (After paying big bonuses of course). It invests in building new facilities for pumping more oil, more refineries, and new technology. The problem is with state-owned companies that need to use the profits to subsidize their populations. The costs of gasoline is around 25cents/gallon in Iran and Venezuela for example. So the oil companies are wasting the money subsidizing the price of oil, while they could be developing their industry. In 10 years, when the have only broken equipment, they will regret this decision. However, if they can keep production low, they will keep prices high, and thus keep the money rolling in, and keep their populations happy.

xgunther's avatar

indicatebound—I dont buy any of it. But thank you for the response.

indicatebound's avatar

Well buddy if you’re in L.A., be thankful it’s still cheap ,,,,
link

edmartin101's avatar

@indicatebound I worked in the wholesale trading of energy. Big oil corporations have long term contracts with Oil producing nations like Saudi Arabia at prices that were agreed upon years ago. They also buy futures and temp contracts. The corps get nailed on the new and temp contracts but the long term contracts are unaffected, but they do charge consumers the same as if they are paying a higher price per barrel when in fact they are not

indicatebound's avatar

edmartin: that’s really interesting. I’m guessing that’s why the newer oil producing states were so keen on nationalising production? (Russia with Sakhlin II, etc.)

sbrannon's avatar

By my understanding, it is because we buy the oil at one price and when it goes to market as gas, it is at the prices that the oil was purchased then. When the oil prices go down, it is not right away the prices go down, but later. Thus the changes of gasoline prices. Also, it depends on state to state the taxes added to the gas. Some states increase the tax during the summer…

zaperrer's avatar

gas itself is relatively cheap (easily under a buck a gallon) however taxes raise it at least over three dollars, and the reason prices were rising as new government programs passed because in the bills they would draw money for the programs by raising the tax on gas. The reason that (in most places) gas fell from six bucks back down to three is that recently many unnecessary government programs were cut.

at least be grateful that we’re not living in europe where the taxes raise the price of gas to the equivalent of over ten dollars a gallon.

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