A look into gasoline market trends and its affect on consumers
Written by Patty Silverstein, chief economist for the Metro Denver EDC, this section identifies major issues affecting the economy and answers frequently asked questions.
Rising gasoline prices have been a major news headline this year and a major headache for many consumers. Despite a drop from the $4 per gallon high in July, the average price of a gallon of gasoline is 38 percent higher than last year.(1) Below are some key questions and answers about recent trends in the gasoline market.
Q: What is included in the price of a gallon of gasoline?
The price of a gallon of gasoline can be divided into four main components: the price of crude oil, the cost of refining that oil, the cost of distribution and marketing, and state and federal taxes.(2) In September 2000, the average price of a gallon of gasoline was $1.55. Crude oil accounted for $0.75, taxes for $0.42, distribution and marketing for $0.14, and refining for $0.24.
By comparison, the average price for a gallon of gasoline was $4.06 in July 2008. Taxes have remained fairly constant since 2000, making up $0.40 of the price. Indeed, the federal gasoline excise tax has been $0.184 per gallon since late 1997.(3) The price of distribution and marketing increased to $0.45 per gallon, but the percentage of the cost has remained fairly consistent at about 10 percent of the total price. The price for crude oil, on the other hand, has been the main driver in the increase in gas prices and amounts to $3.08 of the $4.06 gallon of gas in July 2008. Crude oil now makes up around 75 percent of the cost of a gallon of gas as opposed to 48 percent of the cost in September 2000. The rapid increase in the price of crude oil has pinched refineries’ profits. Refineries only made $0.13 on a $4.06 gallon of gas in July 2008. In fact, CNN Money reported that refineries have cut back their gas production due to lack of profitability.(4)
Q: Where does our oil come from and how much does the United States depend on foreign oil?
A recent report by the Energy Information Administration noted that the United States imported 58 percent of the petroleum American’s consumed in 2007. Petroleum imports include about 90 percent crude oil and 10 percent other petroleum products.(5) U.S. oil production peaked over 35 years ago in 1970 and has been declining since. Until 1997, the share of petroleum consumption produced domestically in the United States outweighed the share of imports. The U.S. consumed 20.68 million barrels of petroleum products per day in 2007.
The U.S. imported about 3.7 billion barrels of crude oil in 2007. Canada was the largest provider of crude oil to the United States in 2007, comprising 18.8 percent of our crude oil imports. Saudi Arabia was second providing 14.4 percent of U.S. crude oil imports and Mexico was third with 14 percent. In 2006, 50 percent of our oil imports came from producers in the Western hemisphere while only 16 percent was produced in the Persian Gulf. However, Persian Gulf stability and production have a large influence on U.S. oil and gasoline prices since oil is traded in the world market, at world prices.
Q: Why is the price of gasoline so high?
The price of gasoline is affected by a number of factors. Short-term price changes lasting a few weeks or months are almost always caused by shocks in gasoline supply since demand is fairly inflexible in the short run. These shocks result from factors such as hurricanes disrupting refinery operations to pipeline breaks and geopolitical instability. Long-term changes in gasoline prices can result from changes in both supply and demand. As noted above, the increased cost of crude oil has driven the increase in the cost of gasoline over the past several years. So the real question to ask is what has caused the price of crude oil to rise so high?
Tony Hayward of British Petroleum noted that “the oil price has been on an upward path for more than six years now. According to our data series, which goes back to 1861, that is the longest period of rising prices on record.” Speculation in oil futures aside, changes in the world’s production and consumption of oil alone drove the price of crude oil higher. Growth in world oil consumption outpaced production starting in 2005. In 2007, the world consumed around 990,000 more barrels of oil per day than in 2006, a 1.1 percent increase. However, production decreased an average of 130,000 barrels per day, a 0.2 percent decline. In terms of quantities, the world produced only 81.5 million barrels of oil per day and consumed 85.2 million barrels of oil per day in 2007, consuming world inventories. This long-term oil shortage has pushed gasoline prices skyward.
In 2007, the Organization for Petroleum Exporting Countries (OPEC) cut production while growth in non-OPEC oil production was anemic. In 2007, OPEC cut production by 356,000 barrels of oil per day, led mostly by Saudi Arabia who cut production by 440,000 barrels per day.(6)
Futures markets may have contributed to some volatility in the price of gasoline and oil in the past few months. However, these markets have not changed the underlying fundamentals of supply and demand in the world oil market. Futures markets create needed liquidity and reduce risk for producers and consumers of a commodity and generally contribute to less severe price swings overall.(7)
Q: How does the price of gasoline affect the markets for other goods and services?
Intuitively, if the price of gasoline and diesel fuel rises, the cost of shipping and distributing all goods and services will also rise, leading to overall price increases. Similarly, since petroleum is a basic material in many products, an increase in the price of petroleum puts upward pressure on the price of many finished goods and services. As gas prices peaked above $4 per gallon, inflation averaged 4.4 percent through July 2008.(8) Why has a nearly 34 percent rise in the price of gasoline from January to July caused overall price levels to rise just 4.4 percent? The prices for goods and services other than energy and other commodities have been surprisingly stable. Core-inflation, which is inflation less energy and food prices, has so far inched upward just 2.4 percent this year compared to the 2007 average increase of 2.3 percent. Still, as transportation and groceries tend to be large components of a household’s budget, consumers tend to be acutely aware of even small changes in these prices.
Q: How have gasoline prices changed consumer behavior?
While short-term price spikes and volatility in the gasoline market have little influence on demand, long-term price increases ultimately change consumer behavior. People over time can move closer to work, buy more fuel-efficient products, and support mass transit. As people now view higher gasoline prices to be a more permanent change to their budgets, options for reducing energy consumption are carefully considered.
In June 2008, daily gasoline sales volumes decreased 8.1 percent from June 2007.(9) Consumers have reduced their reliance on gasoline in a number of ways. Scooter sales have reportedly skyrocketed this year as consumers adjust to rising gas prices.(10) In addition, the market for commuter and electric bicycles is booming.(11,12) Further, high efficiency vehicles are more popular than ever with available cars sitting on the lot for just days before they are sold.(13) Consumers have also turned to mass transit to reduce gasoline use. RTD is struggling to meet the demand for Metro Denver’s transit system with an annual increase in ridership of eight percent in spite of a January rate hike.(14)
The increased cost of gasoline over time has a wide range of effects on consumer behavior by depressing some markets and boosting others. Whether one sees these changes as good or bad, consumers will continue to alter their purchasing patterns based on the new reality of higher gasoline prices.
(1) AAA, “Daily Fuel Gauge Report,” September 15, 2008.
(2) Energy Information Administration, “Gas Components History,” July 2008.
(3) The Tax Foundation, Tax Data, “Federal Gasoline Excise Tax Rate, 1932-2008,” April 30, 2008
(4) CNNMoney.com, “Oil Up On Expected Drop in Gas Supply,” August 19, 2008.
(5) Energy Information Administration, “How Dependent Are We on Foreign Oil?,” August 22, 2008.
(6) British Petroleum, “Statistical Review of World Energy 2008,” June 2008.
(7) Birger, Jon. “What Onions Teach Us About Oil Prices,” Fortune, June 30, 2008.
(8) Bureau of Labor Statistics, Consumer Price Index.
(9) Energy Information Administration, Petroleum Navigator, “Refiner Motor Gasoline Sales Volumes,” August 29, 2008.
(10) Leavitt, Noelle. “Fuel-Efficient Scooters Growing More Popular,” Denver Business Journal, June 27 - July 3, 2008.
(11) Strumpf, Dan. “Electric Bikes Selling Briskly as Gas Prices Climb,” The Denver Post, August 15, 2008.
(12) Raabe, Steve. “Commuters Race to Buy 2-Wheeled Transport,” The Denver Post, July 14, 2008.
(13) Durbin, Dee-Ann. “Toyota Shifts its Focus to Priuses,” The Denver Post, July 10, 2008.
(14) The Denver Post, “Gas Prices Drive Need for Transit,” May 18, 2008, Editorial.