My Car Quest

June 6, 2020

What Is the Real Reason for High Fuel Prices In The US?

A guest post by Adam Brandon –

No doubt we’ve all gone into sticker shock with the recent rise in fuel prices. And this certainly isn’t the first time. Ever wonder what causes these prices to increase? Youíre not alone.

One obvious answer is that the price of crude oil has increased. In fact, until 2003 crude oil prices generally fell below $25 per barrel. Yet, in February 2012, the price per barrel of crude oil stood at approximately $112 per barrel.

That price accounts for about 55 percent of the price of refined fuel. But there are other reasons why weíre paying so much at the pump. And some of those reasons may be less than obvious.

Gas PumpImage via futureatlas.com

1. Global demand. Although demand inside the U.S. is actually decreasing due to higher-mileage vehicles, demand around the world has increased. This is particularly true in countries like India and China, where the middle class is on the rise, as is the number of cars being purchased and the amount of fuel consumed.

2. Speculation by investors on Wall Street and energy companies. Corporations that sell fuel deal in futures markets. Wall Street investors and energy companies have been known to buy up stores of oil and store it, only to sell it later at the futures price. This results in an increase in our current fuel prices.

oil barrelsImage via L.C. Nottaasen

3. Uncertainty in the world. People that sell and invest in fuel are anticipating what will happen in the future, and that is based on what is happening in the world right now. The turmoil in the Middle East, the problems with the banking industry (especially in Europe) and the perception that we need to drill for more oil affects peoples perceptions and places upward pressure on futures prices. The more uncertainty in the world, the more oil companies will raise their prices.

4. The value of the U.S. dollar. It is unfortunate, but true the U.S. dollar has been devalued significantly in the last 10 years. With the dollar in its current weakened state, it takes more dollars to buy the same amount of oil.

Now that we’ve examined the reasons for increased fuel prices, there are a few other facts to consider. The U.S. currently IMPORTS approximately half of our crude oil from other countries, but we are now actually a net EXPORTER of refined fuels for the first time since 1949. Some of the fuel produced in the U.S. is sold in other countries, but we can’t possibly sell enough to meet the global demand and make fuel less expensive for the consumer.

Some say that the answer might be to drill for more oil right here in the U.S., but the environmental regulations that currently exist make that a time-consuming process. U.S. oil production has actually increased during the Obama administration, yet fuel prices continue to rise.

It is very questionable whether the U.S. can produce enough oil to impact the price because of global demand.

We would all like the U.S. government to do something about the rising cost of oil, but the fact is that there is very little the government can do to change it short of nationalizing the oil industry, which many of us would say is not a good idea. Oil companies, whether we like it or not, are in the business of making a profit.

They have a responsibility to their shareholders to do just that, and they make economic decisions that don’t necessarily benefit the U.S. economy. Global demand, investor speculation, uncertainty in the world and the devalued American dollar add up to the high fuel prices we’re all paying. And unless one or more of these situations change, sticker shock could become a way of life.

~~~

Adam Brandon is a blogger for Leonard’s Garage & Service Center, located in Austin, Texas, specializing in auto repair and motorcycle repair.

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