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Why is Gas So Expensive

Why is crude oil and consequently gasoline so expensive? If these questions have been troubling you lately, then this article has some answers for you.
Never would one have imagined that the price of a single product could affect prices of most essential commodities all over the world. That product which impacts economies world over is petroleum (gasoline). The price of petroleum is in turn linked to the price of crude oil, of which it's a derivative.

The oil producing countries of the world have a stranglehold on world economy, due to our complete dependence on crude oil and its derivatives as our primary energy source. In this article, I present an analysis of the factors that affect price of gasoline in USA and rest of the world.

The reason why gas prices affect the prices of all commodities in any country is quite obvious. Without gas, there is no transportation and without transportation, there is no business. Ergo, the price of transportation is an important determinant in the costing of any product. As gas becomes expensive, the prices of commodities automatically rise as businesses raise the price of products to account for rise in gas pricing. They must maintain their profit margins despite the price rise.

Gasoline is the prime energy source world over with a contribution of more than 20% to energy usage in USA. In recent years, we have seen the price of gasoline go beyond $4 per gallon with a considerable local variation in the country itself. It is but natural that one may get baffled thinking why gas is so expensive and why are the prices rising and falling so rapidly.

It is an interesting exercise in economics to study the pricing of a particular commodity and how manufacturing/extraction costs, global sociopolitical factors and dynamics in world economy affect it.

Why is Gas so Expensive Today?

Here are the prime reasons.

Global Rise in Gasoline Demand & Consumption
One of the prime reasons for rise in gasoline prices is the rise in global consumption and overall demand in recent years. If you look at a graph of gas prices history over the years, then you can see an exponentially rising curve. As the global demands rise, it is hard to find newer oil reserves at a matching pace as they are extremely limited.

Higher Costs of Exploration, Extraction & Refining
As major oil fields are fast depleting, exploring new oil fields is increasingly more expensive. Even oil drilling and refining costs of crude oil have gone up substantially. Then there are the added transportation and distribution costs that form a small component in total cost of crude oil. Add capitalist greed of oil producing nations in the form of profit that they earn, and you see the oil prices rising sky high.

Weak Dollar
American's dollar's exchange rate affects commodity prices. The weakening of the dollar in the past has also contributed to price rise as we must pay more dollars to import oil. The situation has improved currently as the dollar has recovered some lost ground.

Iraq War & Other Global Conflicts
The loss of crude oil production during Iraq war and other such global conflicts which affected oil production, led to a decrease in worldwide oil supply. This automatically led to a rise in prices which are controlled by global cartels of oil producing countries. Oil spills are disasters that have an extremely harmful effect on the environment and they also lead to huge losses in supply which affects pricing.

Local Taxes
One often ignored factor which affects gasoline prices is local taxation. State and federal taxation causes local oil prices to fluctuate about the national average. Taxation is the reason gasoline prices differ in different parts of the country.

The only way to rid this world from the iron grip of crude oil price rise is to move towards use of renewable energy resources. Alternative fuel sources need to be tapped. An effort to decrease gasoline usage on our part will also decrease the pressure on global supply.

There are a multitude of factors that affect gas prices, but the prime ones are exponentially rising demand and depletion of oil reserves.
By Omkar Phatak
Published: 9/20/2010
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