The AP on Oil and Gas Prices

The Associated Press takes a question on oil and gas prices, and does a pretty good job explaining the factors affecting prices:

Ask AP: Your News Questions, Answered

Q: Background (my numbers maybe a little off, but you will see my point): About five years ago, oil sold for around $20 per barrel and gasoline was around $2 a gallon. Now oil is about $100 per barrel and gasoline is $3.25ish per gallon. Over the past five years, no new significant oil wells have come into production and no new refineries have come on line. So…

How can oil go up in cost by a factor of five and the cost of gasoline go up by a factor of two? We can only get so much gasoline out of a barrel of oil and our refining efficiency has not improved significantly. The math just does not make sense.

Richard Driscoll

Winnsboro, S.C.

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A: Oil and gasoline prices often move in the same direction, but aren’t tied at the hip.

Oil prices fluctuate with production decisions from the Organization of Petroleum Exporting Countries, or when conflict in the Middle East or Nigeria threatens supplies. Increases or decreases in crude inventories, which come from imports and domestic production, also affect crude prices.

Gasoline prices are more closely tied to demand from U.S. drivers and how well refineries are doing producing gasoline. Falling production and inventories often send prices skyrocketing.

Lately, though oil prices have been at records, gas prices haven’t kept pace, and refiners’ margins have been squeezed. Refiners are making a far smaller profit now than they were in the spring, when gas prices were at records and oil was in the mid-$60s.

The refiners are limited by market forces in their ability to raise prices to try to maintain big profits. So when crude prices go way up, that doesn’t necessarily mean they can raise the prices they charge.

And to clear up those numbers a bit: About 5 years ago — in 2002 and 2003 — gas prices averaged $1.345 and $1.561 a gallon, respectively. Oil averaged $26.15 a barrel in 2002 and $30.99 in 2003.

Gasoline is now at $3.061 a gallon — up 128 percent from 2002 — and the recent record oil price of $100.09 was up 283 percent from the 2002 figure.

John Wilen

AP Energy and Transportation Writer

Now if the public and our elected leaders possessed the same understanding, we might start to get somewhere with our energy policy. As it stands, it seems that most people think prices are moved by the whims of Big Oil. There are entire organizations built around the theme that high gas prices are a result of oil companies increasing their profit margins. As I have stated previously, this has cause and effect reversed. With such a poor understanding of the industry, it is no wonder that we are subjected to nonsensical political rhetoric coming from the presidential candidates*.

* Mike Huckabee says “…we will achieve energy independence by the end of my second term. The Huckabee Administration will be remembered as the time when we finally, finally achieved energy independence.” To that I say that he is either completely deluded, ignorant about how much energy the U.S. actually uses, or is simply telling people what they want to hear. Then again, which president since Nixon didn’t make this promise? And have we grown more or less dependent during each successive administration?