What's to Blame for the Summer Gas Price Spike?

September 10, 2012

Americans paid higher prices at the pump over the Labor Day weekend than during any previous Labor Day weekend, says Bruce Yandle, the dean emeritus of the College of Business & Behavioral Science at Clemson University and a distinguished adjunct professor of economics at Mercatus Center at George Mason University.

  • According to AAA, the average price of a gallon of regular self-serve gasoline hit $3.83 at the end of August, having risen for 49 of the previous 52 days.
  • In January the average price was $3.29.
  • That's 54 cents less than August's price.
  • And remember that this is just the average price, not necessarily what real people pay in real places.

Why such high prices?

First, there's more going on here than just the raw forces of supply and demand.

  • In August, drivers in Hawaii, California, Washington and Oregon were shelling out more than $4.00 for a gallon of gas, but it wasn't always the same gas.
  • As a result of Environmental Protection Agency rules for improving regional air quality, there are some 17 different blends of gasoline sold across the country.
  • When hurricanes and fires hit one of the specialized refineries or disrupt shipments, gasoline from elsewhere won't get the job done.

Second, since gasoline starts with crude oil, and a large amount of crude comes from other countries, there's a dollar problem to think about. When the dollar is strong against other currencies, prices at the pump expressed in dollars go down. And when the dollar is weak, we pay more.

There's more to the story of course. Gasoline would be cheaper if the United States was more generous in producing oil on federal lands and offshore. The Obama administration has expanded drilling on some federal lands, but slowed the approval process for drilling in the Gulf and stopped Atlantic coast off-shore explorations. The administration also frowned on allowing Canadian oil to flow to the lower 48 states by way of the Keystone pipeline.

If we unlocked our known reserves, the United States would become one of the world's largest oil producers. Gasoline prices would head south. Instead of unlocking our supply of gasoline, Washington politicians responding to environmental concerns have cut it back.

Source: Bruce Yandle, "What's to Blame for the Summer Gas Price Spike?" U.S. News & World Report, September 4, 2012.

 

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