What's With These Gas Prices Anyway?

The world is largely at peace. The world's macro-economies in the Americas, Europe, the Far East and Australia seem to be advancing with a comforting steadiness. And though dictators still rule many oil-producing countries, the despots seem to be in much less a saber-rattling mood these days. So just why have gasoline prices across the nation been so unpredictably high with such huge regional differences as we plunge toward the Fourth of July holiday?

The answer to that question is not an easy one, but one thing is sure: today's prices, in un-inflation-adjusted dollars are the highest gasoline prices in history. And they are volatile. In the last month the nationwide average price for a gallon of gasoline has soared 13.3 cents, according to AAA. The organization's well-respected Fuel Gauge Report shows the national average price of self-serve regular unleaded gasoline is $1.644 per gallon, 49.6 cents higher than last July 4 when prices averaged $1.148 per gallon. Self-serve mid-grade unleaded is $1.745 per gallon, 14 cents more than last month and 53 cents higher than last year. Self-serve premium is $1.809, up 14.7 cents since May and up 54.6 cents in one year. Those are price hikes of more than 40 percent in just one year, obviously way ahead of any rise in inflation or wages.

The price hikes on a national basis have been made even worse in some areas by recent governmental requirements for the use of reformulated gasoline. Because of this factor, the Great Lakes region replaced the West as the most expensive area in the nation for retail gas prices. Major supply problems in Detroit, Chicago, and Milwaukee, some caused by shortages of reformulated gasoline, sent prices skyrocketing. Average gas prices climbed above $2 per gallon in some Midwestern metropolitan areas. In fact, AAA noted prices in Illinois, Michigan and Wisconsin exceed prices in Hawaii, which traditionally has had the nation's highest gas prices.

With the exception of a slight retreat in April, gasoline prices have been on a steady climb for the first six months of the year. The average price for a gallon of gas in January was $1.289. The price crossed the $1.50 mark in March, backed slightly below that in April, and shot back up over $1.50 in May. Now the price is well over the $1.60 plateau.

Though gasoline traditionally gets a bit more expensive as Americans cruise into the "summer driving months," this year that rise has turned upwardly much more sharply than in years past, and the current price is the highest in history. Just for perspective, the national average prices for self-serve regular unleaded gasoline in AAA's pre-July 4th survey for the last five years were: 1999, $1.148 per gallon; 1998, $1.108; 1997, $1.25; 1996, $1.303; and 1995, $1.288.

Oddly as prices rose to unprecedented numbers in the Midwest, gasoline prices in California actually dropped two to four cents per gallon since mid-May. Gas prices in the Golden State are still high, but at $1.626 a gallon in Southern California and $1.71 in Northern California, they are nowhere near what unlucky Midwestern drivers are paying right now.

What's going on here? According to expert analysis, there are at least four factors at work, depending on where you live, that have conspired to make your gasoline more expensive this summer.

One key issue is simple supply and demand. Try as he might, Lenin couldn't repeal the law of supply and demand; Stalin couldn't kill it as he killed millions of his countrymen; and Castro is losing his battle with it to this day. As it applies to the current fuel situation, crude oil prices have risen from roughly $10.73 per barrel at the end of February 1999 to more than $32 per barrel this month. This nearly tripling of the crude oil price has had a huge hand in increases gasoline prices at the pump.

Analysts at Detroit-based Comerica Bank believe crude oil prices have risen from extremely low levels because the U.S. and world economies are now expanding in tandem, whereas most foreign economies were still in the doldrums last year in the wake of the 1998 financial and economic collapses in Asia and Latin America. They cite the fact that oil producers actually put a lid on oil production in late 1998 and 1999. Now that demand for oil has accelerated in tandem with a year-long global economic recovery, crude oil prices have advanced swiftly. The rise has been hastened by the fact that oil supplies have been capped by the oil cartel, and, though OPEC nations have announced recently that they will supply more oil, it is doubtful the effect of this will be felt this summer.

A second factor compounding the pain of rising oil prices in the Midwest is an EPA regulation requiring reformulated gasoline to conform with Energy Department environmental targets. Reformulated gasoline costs more to refine, and refiners always seem reluctant to switch production, perhaps in fear of losing profits in the transition. Nationally, the new rules, effective June 2000, have added nearly 10 cents per gallon to the pump price, according to Comerica Bank, and in the Midwest, with the added difficulties resulting from blending the oxygenate ethanol, added costs per gallon amount to 35-40 cents. The cost escalation has been so great that AAA recommended an immediate 90-day "reprieve" from the Environmental Protection Agency's current requirement that reformulated fuels (RFG-2) be offered as a part of local clean air compliance in selected areas in the Midwest. Politically, chances of an EPA moratorium on its rule are slim.

As if the news weren't bad enough for cash-strapped motorists, an early-June break in a pipeline that carries nearly 30 percent of Michigan's gasoline has ratcheted pump prices upwards by approximately 45 cents per gallon in that highly populated state, and other states also dealt with pipeline shutdowns.

Some might blame government taxation for part of the gasoline price problem. After all, a significant portion of the price you pay per gallon of gas goes to federal and state governments in the form of excise and, in some cases, sales taxes. To be fair, however, the federal government last hiked the excise tax per gallon of regular unleaded gasoline by 4.3 cents in October 1993 (to 18.4 cents), and it has remained there. Several states, though, have upped their excise and sales taxes since then, helping boost the overall cost of gasoline to the average motorist.

Is any relief in sight? Comerica Bank believes that by late summer the worldwide demand for oil will decelerate as world economies slow down. It also predicts oil producers, encouraged by rising prices and profit potential, will increase oil supplies, placing downward pressure on prices for the balance of 2000. The bank's experts point to growing incentives on the part of oil producers to "cheat" on the cartel production quotas. They suggest, despite efforts to discipline member and non-OPEC member oil producers, the history of the oil markets reveals a clear pattern of cheating by nations eager to capture revenues before prices plummet.

How soon this will affect prices at the pump remains a mystery. Some experts predict that gasoline prices will remain high throughout the summer, not declining until the fall. Others, including Comerica Bank, say if no further tax or regulatory burdens are imposed on the industry, and if the unusual factors plaguing pipelines and refineries are contained by early July, retail prices of unleaded regular fuel should be down nationally by at least 30 cents per gallon by late summer. Meanwhile, fill 'er up at your own expense.


Rockefeller Getty writes about the oil and gas industry on a regular basis from his office in Denver.