NCPA - National Center for Policy Analysis

Gas Prices Explained

September 3, 2010

What determines the price of gasoline?  Speculators?  Evil conspiring oil companies?  Well, actually no.  It is demand and supply, of course.

On the demand side the American automobile fleet gets better gas mileage than it did a few years ago and Americans are driving a bit less than they used to.

  • In addition, about 9 percent of what goes into our gas tanks is ethanol produced from corn, which also reduces the demand for refined crude.
  • On the supply side, global oil supplies are ample and refiners in the United States have stockpiled a lot of gasoline recently, says Ronald Bailey of Reason Magazine.

So what can American motorists expect for future gas prices?  It all depends on the price of oil, says Bailey.

  • Earlier this year, the international insurance syndicate Lloyd's of London issued a rather bearish report suggesting that "a spike in excess of $200 per barrel is not infeasible" around 2013.
  • On the other hand, Cambridge Energy Research Associates (CERA), one of the world's leading oil supply consultancies, rejects the notion of imminent "peak oil" and projects a more bullish production increase from about 85 million barrels per day now to over 115 million barrels per day by 2030.
  • After 2030, the CERA analysts foresee global oil production reaching an "undulating plateau" lasting for several decades, perhaps until 2070, before it begins a permanent decline.
  • The CERA report also speculates that "peak demand" could happen before peak oil is ever reached.

The key variable to keep in mind therefore when looking at future oil prices is how much spare production capacity is available globally.  Spare capacity prevents and cushions price shocks.  During the 2008 price run up, global spare oil production capacity fell to as low as one million barrels per day.  According to CERA, current spare capacity is a comfortable 6.4 million barrels per day, says Bailey.

Source: Ronald Bailey, "Gas Prices Explained," Reason Magazine, August 31, 2010.

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For CERA report:


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