Why Gas Prices Are Increasing

The trend of constantly rising gas prices is always a central focus in the U.S. economy; it’s a significant political issue from a global perspective, and it is continually making headlines. According to the U.S. Energy Information Administration (EIA), the prices of gas are expected to remain significantly high throughout 2012 due to tremendous increases in global oil consumption.

What exactly is leading to this trend?

As of now, these sudden spikes are due to the large amounts of money coming in from investors as they move in and out of the merchandise market.

Currently, the economy is recovering from the recent economic downturn and there is no easy solution or quick fix..

For the year of 2012, the EIA predicts that the average price per gallon is expected to be about $3.55 per gallon, with the 2012 average around $3.59. In 2010, the annual average price was approximately $2.78 per gallon. Furthermore, the EIA is predicting summer gasoline prices to be around $3.88 per gallon, but by July they are expected to be more than $4 a gallon.

The agency predicts that “by 2020 oil production will reach a level not seen since 1994.” After the 2008 recession, the agency accounted that there was a drop in the petroleum consumption due to the economic decline, new efficiencies and changes in consumer behavior.

While looking at its Short Term Energy Outlook, the EIA saw that world crude oil and liquid fuel consumption grew to 87.1 million barrels per day in 2010, as compared to 2007 when it was 86.3 million barrels per day.

The trend for world liquid fuels consumption is expected to grow by 1.3 million barrels per day in 2011, and 1.5 million barrels per day in 2012. The current price of the best trade of US oil is $106 per barrel, an increase from 2010, while it was $79 per barrel.

Robert Sinclair Jr., a spokesman for auto club AAA N.Y. stated that it takes approximately a month for an oil price to decrease in order for it to translate into lower gas prices. The increase of gas prices follows the basic principles and trends of capitalism. He stated that as crude prices rise, accordingly gas prices increase as well. But when crude prices fall, it translates into a longer time before gas prices reveal the change.

Commodities traders who buy and sell future contracts on the market control the high oil prices. Essentially, they are agreements that allow for people to buy or sell oil in the future at an exact price that is set at.

As the value of the dollar has gone down, it makes it a bit more complicated for gasoline prices to go down.  Over the last six years, the 4 percent decline in the dollar has had major consequential effects on the economy since the oil prices are entitled in dollars.

Supply and demand is the major economic concept that is controlling the high oil prices. Prices that fluctuate daily contribute to these higher prices. Moreover, because traders set the prices due to the commodities, and when the traders believe oil will be high, this in turn leads them to bid even higher on these prices.  As a result, this causes high gas prices.

At times, they can bid up oil prices. Once this occurs, it leads to a larger problem because it leads to what is an “asset bubble,” which occurs if a commodity is demanded in surplus, thus it leads to the prices of assets being over-inflated.  The people who pay for the asset bubble are the individuals in the economy, which ultimately leads people to be upset because of higher prices.

Gas prices are a fundamental issue in the presidential campaign as they are continuously soaring up. As this issue is a central issue in the election, many Americans are relying on Obama to address this issue as he is currently in the process of devising a strategy.

He recently stated, “High gas prices are like a tax straight out of your paycheck.” Obama alluded to the fact that the rising prices an indication that the U.S. needs to develop new energy sources. Furthermore, he stated in Florida that the necessity to better domestic drilling is requested every year.  Obama claimed, “It’s not a strategy to solve our energy challenges.”

Instead, he is working to implement an “all-of-the-above to energy independence” strategy —gas oil, wind, nuclear, solar, bio-fuels and more. Essentially, his strategy revolves around the focus of renewable fuels, therefore promoting nuclear energy and natural gas.

Obama was considering the fact of executing the Keystone pipeline strategy, which was going to bring crude form Canada to refineries in Texas.

Presently, the final decision about this strategy has been delayed until after the election because this course of action could propose danger to the water supply.

The White House provided evidence that his strategy is functioning because of the increased oil production and decreased consumption leading to greater energy independence. Generally, lower oil prices is a good indication that gas prices will decrease, but it may be weeks before consumers begin to pay less while pumping gas.

One of the prevalent concerns that the White House has is the fact that Iran pushes persistent threats in their goal to disarray international oil trade, which in turn accelerates gas prices and leads to weakened economic growth.

Obama is taking action in order to expand domestic production and improve fuel efficiency. Recently he wanted to decrease tax incentives for the oil industry and prompted resurgence of a clean energy tax credit in Congress. Furthermore, this strategy leaves lawmakers in a difficult position as they are split; hence, small legislative action is going to be expected this year.

In terms of decreasing prices, many people agree that the best solution would be to use alternative fuels in the form of public transit. Not only are they better for the environment, but they are less expensive.  This would inevitably help each individual on the issue of gas prices as there would be a decrease in the consumption of gas.

Some feel that this will not really reduce the gas prices, but it can.  In order for it to happen, it would have to reduce the demand for oil, thus lowering oil prices. Evidently, this would take a longer period of time to implement this strategy. Gasoline prices only account for 20 percent of each barrel of oil, therefore oil companies can still make a profit from “the non-gasoline parts of their business.”

All in all, with the economy slowly starting to rise up from the recent economic downturn, the prices of gas decreasing will happen in a matter of time, as there is no solution for a quick fix.


Ruhani Sandhu is a second-year public health science major. She can be reached at rksandhu@uci.edu.