The People of America's Oil and Natural Gas Indusry

The Facts about Rising Gas Prices

Jane Van Ryan

Jane Van Ryan
Posted March 9, 2011

There's a photo of a large gasoline-price sign making the rounds on the Internet this week. Instead of listing the retail prices, it advertises the pump price of regular gas as "LOL"; the price of midgrade is listed as "OMG"; and premium is "WTF." Although some might say the photo is amusing, for those on a limited budget, the rapid climb in the price of gasoline is alarming.

The U.S. Energy Information Administration (EIA) says gasoline pump prices have climbed more than 33 cents a gallon in the past two weeks, making the price increase the second largest ever recorded by the government over a two-week period. According to AAA, the average price of gasoline yesterday (3/8) was $3.52 a gallon.

Gasoline is refined from crude oil, and the cost of crude oil on the global market has climbed significantly. On Monday (3/7) West Texas Intermediate (WTI) oil closed out the trading day at $105.44, which was the highest price in 29 months. Yesterday (3/8), the price fell slightly to $105.02. Brent crude oil, which is another benchmark crude, has traded at higher price points.

The sharp price run-up led the EIA late yesterday to raise its 2011 average oil price estimate to $105 a barrel, adding that there is a 25 percent chance that gasoline could surpass $4.00 by this summer's driving season. EIA attributed the higher prices to the continuing "unrest in Libya as well as other North African and Middle Eastern countries [which] has led to the highest crude oil prices since 2008...."

As we've explained on this blog, political turmoil is one of the factors that can influence the price of oil. Other factors include strong demand for oil and oil products, such as the sharp demand increases being recorded in China and India, and foul weather. No one "sets" the price of oil. Rather it is determined by the thousands of buyers and sellers who place bids for oil on global commodities markets, based on what they think oil is worth at any given time.

For this reason, economists call oil producers "price takers, not price makers." Oil companies produce the oil and make it available on the marketplace, but the price is set by the markets. Similarly, farmers also accept the going rate for their commodities such as corn and soybeans.

Since the Libyan turmoil began, AP reports that gasoline prices have been costing American motorists an additional $146 million per day, putting pressure on families and the economy. In response, the White House has said it is considering several options to address gasoline prices, including using the Strategic Petroleum Reserve to depress prices; the Chairman of the House Natural Resources Committee is scheduling hearings on ways to increase U.S. oil production; and at least two Senators have delivered speeches on the Senate floor that criticized the administration for its energy policies, including the offshore drilling moratorium.

As Politico reported, Sen. Chuck Grassley (R-IA) said, "Isn't it a little foolish to have our economy held hostage by events in Libya, North Africa generally, or the Persian Gulf area?" Sen. John Barrasso (R-WY) said, "We want to find more [oil], and under this administration we've been finding less."

American families are aware of the benefits from increasing the production of domestic energy. As a new poll indicates, a majority of Americans favors domestic drilling both onshore and offshore. They know domestic energy development not only produces more oil and natural gas, but it also creates jobs, generates government revenue, and improves U.S. energy security. It's time for the administration to support, not discourage, the development of American oil and natural gas for U.S. consumers.