If the U.S. goes to war, the assumption is that the supply line from the Middle East will decline and reduce the available supply of gas, driving prices up.
While that could happen, Dr. Peter Clark of the University of Alabama notes that other, less obvious factors may come into play.
"We have multiple suppliers. The Middle East is only one place," said Clark. "The other thing that has happened is the economics in the Middle East are so oil-driven that they don't have the freedom to cut back on production of oil like they did in the 1970s, when they were trying to influence world policy by making oil short."
When prices change dramatically, sometimes even overnight, some consumers have wondered if there's price gouging going on. Dr. Bill Shughart of the University of Mississippi said he doesn't think so.
"Like it or not, this is how the markets work in the sense that the price of gas is not determined solely by supply and demand," said Shughart. "Today it's also affected by the expectations about the future."
As to how much higher gas prices might do, Clark said long-term and short-term speculation is vastly different.
"In the long term, what happens in the Middle East will depend a great deal on the reaction of the Saudis and Kuwaitis to a war in Iraq," said Clark. "If they react negatively and cut back on their oil, then we'll be impacted."
The up side would be if those oil-rich nations don't react negatively, it would probably make very little difference to the supply of oil in the country.
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What determines the price you pay at the pump?
- Federal, State, and local taxes are a large component of the retail price of gasoline. Taxes (not including county and local taxes) account for approximately 28 percent of the cost of a gallon of gasoline. Within this national average, federal excise taxes are 18.4 cents per gallon and state excise taxes average about 20 cents per gallon. Also, some states levy additional state sales taxes, some of which are applied to the federal and state excise taxes. Additional local county and city taxes can have a significant impact on the price of gasoline.
- Refining costs and profits comprise about 14 percent of the retail price of gasoline. This component varies from region to region due to the different formulations required in different parts of the country.
- Distribution, marketing and retail station costs and profits combined make up 12 percent of the cost of a gallon of gasoline. From the refinery, most gasoline is shipped first by pipeline to terminals near consuming areas, then loaded into trucks for delivery to individual stations. Some retail outlets are owned and operated by refiners, while others are independent businesses, which purchase gasoline for resale to the public. The price on the pump reflects both the retailer’s purchase cost for the product and the other costs of operating the service station. It also reflects local market conditions and factors, such as the desirability of the location and the marketing strategy of the owner.
- In 2000, when the price of crude oil averaged $28.23 per barrel, crude oil accounted for about 46 percent of the cost of a gallon of regular grade gasoline. In comparison, the average price for crude oil in 1999 was $17.51 per barrel, and it composed 37 percent of the cost of a gallon of regular gasoline. The share of the retail price of regular grade gasoline that crude oil costs represent varies somewhat over time and among regions.
Why do gas prices fluctuate?
- Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local retail station competition.
- Additionally, gasoline prices can change rapidly due to crude oil supply disruptions stemming from world events or domestic problems, such as refinery or pipeline outages.
- When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer, when people drive more, and decline in the fall and winter, when people drive less. Good weather and vacations cause U.S. summer gasoline demand to average about six percent higher than during the rest of the year. If crude oil prices remain unchanged, gasoline prices would typically increase by 5-6 cents during the summer.
- Vents in crude oil markets were a major factor in all but one of the five run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council’s study U.S. Petroleum Supply - Inventory Dynamics.
- Crude oil prices are determined by worldwide supply and demand, with significant influence by the Organization of Petroleum Exporting Countries (OPEC).
- OPEC has the potential to influence oil prices worldwide because its members possess such a great portion of the world's oil supply, accounting for nearly 40 percent of the world's production of crude oil and holding about 67 percent of the world's estimated crude oil reserves.
- Rapid gasoline price increases have occurred in response to crude oil shortages caused by, for example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990.
- The most recent gasoline price increases are due in part to OPEC crude oil production cuts in 1999. In addition, higher demand from a recovering Asian economy caused more competitive bidding for crude oil supplies in the international market and was a contributing factor to an increase in gasoline prices in 1999.
- OPEC once again cut crude oil production in Jan. 2001 to forestall anticipated excess supply in late Spring.
- A continuing economic boom in the United States has led to greater demand for gasoline. If demand rises quickly or supply declines unexpectedly due to refinery production problems or lagging imports, gasoline inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers become concerned that supplies may not be adequate over the short term and bid higher for available product. Such was the case in late summer 1997, as a demand surge drained gasoline stocks and prices rose rapidly.
Source: www.eia.doe.gov contributed to this report.