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| Fig. 1: Breakdown of gasoline prices. This figure explains the various price components of gasoline. A majority of the price depends on the price of crude oil, which is obtained mostly from foreign countries. [3] |
The United States consumes about 9 million barrels of gasoline every day, or 92 billion gallons of gasoline per year. [1,2] These numbers fluctuate minimally, where some increases can be seen during holidays. The availability and inexpensive gasoline provides stability to the U.S. economy and, in so so doing, protects the freedoms of its citizens.
The price of gasoline is typically broken down into four different categories: taxes, distribution and marketing, refining, and crude oil. As of October 2010, the average national price of gasoline in the US is about $2.80/gallon. [3] The largest portion of the gasoline price comes from the crude-oil manufacturers, particularly the Organization of the Petroleum Exporting Countries (OPEC). The price of crude oil has been found to fluctuate heavily between $30-$130 a barrel. [4] Refining costs are based on the different types of oil: heavy or light. Distribution and marketing refer to the costs needed to transport and market the oil to the consumer. Both the United States federal and state governments impose taxes on the gasoline. Though these taxes are considerably less than those in Europe, they account for about 15% of the gasoline prices in the US. [4] Gas stations only have a miniscule input, usually the tacking on of a few cents per gallon. Gasoline prices are also subjective to competition. It is also important to note that world problems, stochastic events, and wars can significantly raise gasoline prices.
The national average price of gasoline in 1919 was 25 cents per gallon. [4] At first glace, many would suggest that the price of gasoline has risen drastically. Is this truly the case? In the comparison of the history of gas prices, it is necessary to take inflation into account. In order to adjust previous year prices to with the current inflation, the following equation was used:
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| Fig. 2: Annual motor gasoline retail price ($/gallon). This figure was constructed the national average gasoline prices for each year from 1919 to 2010 provided by the EIA. [4] These nominal prices were converted to 2010 dollars by adjusting for inflation. In fact, the gasoline price from 1919 was 18% higher than the current gasoline price. |
where CPI is the Consumer Price Index and is a measure of the average change in prices over time in a fixed market of goods and services. Using the information on national average gasoline price and the annual CPIs from the EIA, the national gasoline price for each of the year from 1919 to 2010 was calculated in 2010 dollars. [4] In Fig. 2, the adjusted "real" gas prices along with the nominal (price during that year) and present day gas prices were graphed with respect to the various years. The nominal gasoline prices used to construct the graph were obtained from the U.S. government (EIA), a source that the author feels is reliable. [4] It should be noted that these are national average gasoline prices during a particular year and do not show the highs and lows throughout the entire year. For example, in 2009, the gasoline price reached a much higher price than the reported national average gasoline due to the effects of the economic recession. For the purpose of this paper, the national average gasoline prices were used to show the historical gasoline prices fluctuated year over year.
With the inflation accounted for, the national average price of gasoline in 1919 is about $3.22 per gallon, an 18% higher than the current national average gasoline price. Over the course of the past 60 years, the national average price of gasoline has remained below the 2010 price, except for the anomaly that occurred near the 1980s. This was due to the Iranian Revolution in 1979 and the consequent invasion of Iran by Iraq in 1980 that strongly disrupted Iraq's and Iran's oil production. With the price of gasoline slowly surging, could this trend suggest that the price of gasoline with continue to increase? Will Americans be able to tolerate increasing prices of gasoline?
Oil is an integral part of the American lifestyle and this dependence suggests that Americans will pay any price for it. In 2007 and 2008, the gasoline price significantly rose compared to those of previous years. One of the reasons for the price surge was the increasing number of car buyers and car manufacturers as a result of expanding economies in China and India. This increase in demand for gasoline hypothetically caused the U.S. gasoline prices to skyrocket over four dollars per gallon. [5] During this time, Americans tried to cut back on gasoline use through carpooling and limiting use of Large SUVs. However, the high prices of gasoline could not be effectively avoided due to the U.S.'s heavy reliance on oil.
The U.S. depends on large oil imports from foreign countries such as the OPEC, Canada and Venezuela. So, why do these oil suppliers not raise the prices of oil knowing that oil is essential to the vitality to most countries? The answer to this question involves the understanding of the economics and politics behind the scenes rather than merely interpreting the history of gas prices. There are many competing theories about the economics and politics within the oil industry that may help resolve some of these issues.
A possible solution is for the U.S. government encourages companies to develop renewable energy such as solar energy, wind energy, hydropower, and geothermal energy. Renewable resources provide the benefits of more energy for future generations, lower energy costs, and overall stability of the United States, especially that of the economy.
Many Americans recognize that there is an energy crisis, but do not fully comprehend its magnitude. It is important to inform the public that energy constitutes enormous power. The U.S. seems to find itself at the mercy of large oil suppliers leaving our economy at the whims of these oil powerhouses. Alternative and renewable energy may allow the U.S. to have less dependence on foreign oil. This will be one less factor that will affect our economy, government and politics.
© Quan Bui. The author grants permission to copy, distribute and display this work in unaltered from, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] K. Tan, "Drip, Dripping Away," Barron's, 31 Aug 2009.
[2] P. Brown, "How Many Miles to the Bushel?" The New York Times, 27 May 06.
[3] "Gasoline and Diesel Fuel Update," United States Energy Information Administration.
[4] "Short-Term Energy Outlook - Real Energy Prices," United States Energy Information Administration, 9 Nov 10.
[5] C. Krauss, "Oil Prices Find a Sweet Spot for World Economy," The New York Times, 30 Mar 10.