NCPA - National Center for Policy Analysis

Gasoline Prices: Why So High, and What to Do?

June 1, 2012

Though gasoline prices have dipped in recent weeks, persistently high charges for fuel have many consumers shifting their budgets in response, says Kenneth P. Green, a resident scholar at the American Enterprise Institute.

  • SymphonyIRI reports that 57 percent of consumers are feeling increased financial strain when gas prices increase.
  • Based on polls conducted in the second quarter of 2011, more than four in 10 say high gas prices make it difficult to meet monthly expenses.
  • Forty-nine percent of consumers plan to reduce grocery spending if gas prices climb another 50 cents.
  • On "Super Tuesday," seven out of 10 primary voters said gas prices were an "important" factor in their decision.

The primary reason for high gasoline prices, as any economist will tell you, is very simple: world demand for oil is strong and the supply is limited.  The cost of crude oil dominates the price of gas: in January 2012, it represented 76 percent of the price.  Yet to chalk high prices up to the increase in raw oil alone is misleading.  In reality, a number of factors contribute to higher prices.

  • Risk: Unrest in the Middle East is a perennial cause of worry over world oil supplies.
  • Loss of production: The Obama administration's moratorium on the development of domestic oil production in the last two years has cost the United States $4.4 billion in output costs, 19,000 jobs and $1.1 billion in wages.
  • Taxes: The tax bite in a gallon of gasoline is nearly equal to the costs of refining, distribution and marketing combined; at the national average of $3.79 per gallon, taxes are approximately 53 cents per gallon.
  • A fractured market: Refiners have been made responsible for producing 17 different boutique fuels (with three separate grades each) that are sold in dozens of discrete markets, thereby contributing to price volatility.
  • A weak dollar: From its peak in March 2009, the dollar has fallen 17 percent against other major currencies, which is equivalent to a 20.5 percent increase in oil prices.

Source: Kenneth P. Green, "Gasoline Prices: Why So High, and What to Do?" The Blaze, May 15, 2012.

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