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Why Are Gas Prices So High?

May 21, 2008
Gasoline prices are at an all-time high in the United States today. Even though this price pales in comparison to the prices paid in some other countries around the world, it can no longer be reasonably argued that the price we pay at the pump today in the U.S. is a bargain.

In recent times the price of gas hovered around $3.20-$3.30 a gallon. Then, we used to be able to argue that this price was not an all-time high when based on the price adjusted for inflation. It is true in parts of this 50's, 60's and '70s gasoline prices were higher than $3.00 a gallon if we adjusted the dollars for inflation.

It's at an all-time high

However, at $3.80 a gallon we've broken through this threshold. Now of course, the gasoline we buy at the pump today is a much more expensive blend than what we bought at the pump in the '50's, 60's, and 70's. This is because the gasoline we buy today has to meet much stricter environmental standards and this pushes the price up.

Still, the price of gas is high when compared to just a few years ago and this begs the question, why? In this article, we will explain the reason we pay what we do for gasoline today. First, let's start with what the reason is not.

Evil big oil

How do high gasoline prices help oil companies? There is no logic to the assumption they do. If there was only one oil company it would be different, however, there are a lot of oil companies. Each one competes against the others. If one company can sell for less, this company will. In doing so they will gain a larger part of the market and make more money. By raising prices, companies stand to price themselves out of the market. This is senseless!

On top of that, with prices so high, alternative fuels become more viable and relatively affordable. Is this what gas companies want? Are they looking to put themselves out of business? Blaming oil companies is an easy and convenient answer to our problem, but it is not logical.

Economics 101: Supply and demand

Any capitalistic economy depends upon the law of supply and demand to set prices. Prices are based on how much of a commodity exists and how much demand there is for this commodity. In recent years, China and India have become huge buyers of oil. Since the supply of oil has not increased, the price of course, has increased. If the people of China were still using rickshaws as their mode of transportation, perhaps we wouldn't be having this problem.

Normally, when a commodity has increasing demand, suppliers will make more of this commodity in order to gain a larger share of the market. In America, oil companies are not allowed to do this. There have been no new refineries built in the United States since 1967, and American oil companies are not allowed to drill in the Gulf of Mexico like Mexican companies are.

For the last several years some folks, George W. Bush being one, have called for the drilling for oil in the ANWAR region of Alaska. Certainly, if we were drilling for oil there, the oil supply would be increasing.

A republican led bill calling for drilling in ANWAR was proposed in 1994 and President Clinton vetoed it. Some say there is a veritable Saudi Arabia in this region, if this is true, and this bill was not vetoed, it stands to reason we would be more than meeting the supply of our oil consumption by now. So, this price pinch would not be occurring.

Market volatility

Added to the two problems of the growing need for oil and the supply which environmentalists prohibit us from using, is the problem of market volatility. In capitalism, prices of commodity swing wildly upward and downward. A case in point would be the recent real estate boom. During 2005-2006, prices of real estate became very high; to a lot of people, the prices were actually untouchable. It was at this time, the pundits started to ask, when will the real estate bubble burst?

They asked this question because it was obvious the price of real estate could not keep going up forever. There had to be a point at which no one would be able to afford real estate if it kept shooting upward. The pundits were right. The bubble did burst and the price of real estate has come tumbling down.

We can also look back to the tech stock boom of the 90's. At one point the NASDAQ was trading over 5,000. At this time, many analysts were telling us to keep buying these stocks because the NASDAQ was going higher. However, there came a point when the NASDAQ was no longer a bargain and the price came tumbling down; all the way to 900. Obviously, the NASDAQ had been overbought and could not sustain trading at such high numbers.

Right now it's impossible to look at what's happening in the crude oil market and not see similarities between the real estate bubble of 2006-2005 and the NASDAQ boom of the late 90's. It is very likely crude oil is now very much overbought and will come tumbling down as well.

However, for the time being were stuck with high oil prices and though there are politicians who want us to never become oil independent, there are many of us who believe we will always be under pressure from high oil prices if we don't start drilling our own.
About the Author
Ed Lathrop is a series 3 commodities futures broker. He has extensive knowledge of the economy in general. He has developed EzCalculator, a Mortgage Calculator that includes the famous "How to Make $100,000 on Your Mortgage" calculator. Mortgage Calculator! Also, get a free house payment chart which can be printed out on a single page at: House Payment Chart. These site are not affiliated with any lender.
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