Eek! Gas prices

One national issue that normally hits home locally is gas prices. We feel the effect of these prices daily: commuting to work, traveling out of state, and driving to the grocery store and restaurants.

These high gas prices cut into what goods and services we would otherwise spend money on. Economics aside, it goes without explanation that high gas prices are a major burden on our wallet.

But one area where people somehow get confused on is the President’s influence over gas prices, with some buying into a myth that the President of the United States directly controls prices. Further, when gas prices are high, the citizenry normally pivots much of the blame toward the President, as if he was solely responsible.

This piece attempts to explain why gas prices fluctuate and separate fact from fiction.

First, it is important to note that the President of the United States can have influence over gas prices because certain political decisions can sometimes influence economic outcomes.

Take, for example, what happened with gas prices in the early 1970s. In 1973, the Organization of the Petroleum Exporting Countries (OPEC) placed an oil embargo on countries that supported Israel during the October Yom Kippur War. The United States supported Israel.

The embargo on oil caused the commodity to become more scarce. Refineries were not able to receive the product to convert to gas and, as the supply of gas became more limited, gas stations had no choice but shift the cost onto consumers and raise gas prices. By 1980, Americans found themselves having to pay as high as $2.95 a gallon (adjusted for inflation). At the time, this had been the highest on record.

Figure 1 below illustrates the average price of gas since the federal government began recording in 1929 (adjusted for inflation via 2015 dollars).

Average Historical Annual Gasoline Pump price, 1929-2015

Figure 1: Chart via U.S. Office of Energy Efficiency & Renewable Energy

While gas prices between $2.00 to $3.00 seem like the norm today, it is important to note that in the 1970s it had been nearly twenty years since prices have hovered around those levels (adjusted for inflation). Moreover, prices since 1930s were on a constant trend downward until the early 1970s. So when prices rose as much as they did, it triggered a major shock to the economy. In effect, geopolitics does play a role in gas prices.

However, the main reason why gas prices fluctuate are the economic forces of supply and demand.

If the production of oil grows faster than demand, oil prices will decrease because the resource will become more abundant. Consequently, if there is too much demand for oil and not enough supply, as what happened in the 1970s, prices go up.

Moreover, about 43 percent of the retail price of gas is dependent upon the cost of crude oil itself. Other retail price factors include refining costs (25 percent), distribution costs (10 percent) and federal and state taxes (22 percent).

When it comes to that cost of crude oil, nearly half of the world’s oil comes from the Middle East because of the region’s abundance of petroleum.

OPEC has a lot of influence on this because the organization is responsible for about 44 percent of the world’s oil production and 82 percent of the world’s crude oil reserves.

Every year, OPEC sets production quotas, based on contemporary and future economic factors, which influence the price of oil on the international market. If OPEC decides to keep production up, prices will decrease. If OPEC decides to cut their production quotas, prices will increase.

Again, geopolitical factors can have influence over their decisions, but solely blaming the President on what we pay at the pump is often exaggerated and, most of the time, mendacious. Two or more oil abundant countries engaged in international conflict can cause the price of oil to increase due to supply chains being disrupted. While this may be completely out of the United States’ control, the tension can result in us paying more at the pump.

The United states, along with China, are the two largest oil consumers in the world. Since OPEC’s embargo on oil in the 1970s, the U.S. has revisited multiple efforts to rely less on foreign imports or to become completely energy independent.

However, with the interconnectedness of today’s world economy demanding corporation among different international actors and complexities of the United States’ reliance on foreign oil (not to mention it’s history), that pursuit may not be the most pragmatic.

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