What is Driving the Rising Cost of Gas?

Michael Teague  |

Last November, the International Energy Agency announced that the United States was set to surpass Russia and the Kingdom of Saudi Arabia to become the world’s top oil producer by 2017. Indeed, thanks mostly to discoveries of large deposits of oil in shale formations around the country (Colorado, Texas, New York), and vastly increased drilling operations to retrieve it, the claim has quickly become common knowledge, even conventional wisdom.

This has many people asking, and with good reason, why gas prices have been rising for 32 straight days, according to AAA, to a national average of $3.748 per gallon of regular. The reasons are various, as usual, but there are some concrete and verifiable factors that should be considered when explaining the current situation.

Not everyone may be aware of the fact that our refineries go through a routine process of maintenance in order to produce a different type of gasoline for the warmer summer months. But this explanation does not come close to accounting for the dramatic increase in prices.  Super storm Sandy and other unexpectedly extreme seasonal weather have also been cited as a reason for refinery closures.

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Though domestic energy production is up, especially over the past year, and is set to increase another 50 percent over the next three, the U.S. is still buying a large amount of crude from the world’s major producers such as Venezuela, Saudi, and Canada, all of whom offer a much heavier and more difficult-to-process type of oil than that which we would procure from other regions of the world. While refineries have to a certain extent been anticipating the switch from the increasingly rare light-sweet crude over the past 10 years or so, and updating factories accordingly, there is still some indication that not all refineries are ready for the switch.

Then there is Saudi and OPEC oil production, which has recently been reduced, it is rumored, by a million barrels per-day, ostensibly in reaction to the IEA announcement about impending U.S. energy independence, as well as increased production in other regions. This has affected the global oil market, as it has driven up the overall cost per barrel, a cost that gets passed down to consumers at the pump.

Finally, there is the role of speculation that has been written about recently in outlets such as the Christian Science Monitor and the Huffington Post. Traders on the futures market have been encouraged by the relatively consistent and positive numbers posted by Wall Street to kick off the new year, and thus expect higher consumer demand for, among other things, gasoline.  This in turn causes oil companies to stockpile their reserves, in the belief that they may be able to sell it later at a higher price.

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