FAQ: “WHY IS GAS SO $#@!ING EXPENSIVE??!!”

 

This question has turned up on my social networks a number of times in the last few weeks as gas prices have risen quite a bit over the past month or so. The short answer: it’s not. Ok, ok…that’s not what you wanted to hear. $3.89 a gallon is a lot when you’re used to gas in the low-to-mid $2 range. It’s about that much per liter in places that don’t give insane subsidies to oil companies, but let’s just tackle the question of why gas is so relatively expensive right now. Keep in mind the explanation below should be taken as a 10,000-meter overview and barely scratches the surface of all of the factors that affect the price of gas. But it’s a pretty good look at what’s affecting things right now.

Because the price of gas is tied very closely to the global price of oil, when things happen that either change the global supply of oil or make investment speculators think the supply of oil is going to change, they adjust their purchase and offer price for oil futures accordingly. (Investment speculation is based entirely on buying stakes in a commodity based on what you think it will be worth at some point in the future.)

So recently, Iran (a significant producer of oil) stopped exporting oil to several countries in Europe, and Israel has been rattling its sabers in the direction of Iran, among a handful of other things that indicate possible future instability in oil-producing regions abroad, meaning that speculators are hedging that the global supply will decrease, making the price go up.

You’ll note that I keep talking about the “global price.” Oil is what they call a “fungible” commodity–meaning that it doesn’t so much matter who is producing oil or how much, if production is impacted in any oil-exporting nation, the price is affected worldwide. (It also means that no matter where the oil that made the gas of your tank came from, all oil producers ultimately get a cut of what you paid.) So the old chestnut about how gas prices would be lower if the U.S. could somehow drill for/refine more oil is largely false. What’s really odd is that the only way that could possibly work is if the American oil industry operated completely isolated from the global market–meaning we neither imported nor exported any oil–which, for those of you who are starting to think that sounds like a good idea, would likely cause a global economic collapse of epic proportions.

Additionally, gasoline refineries in the U.S. use two different “blends”–a summer blend and a winter blend. We’re about at the time of year where suppliers are switching to their summer blend, which is more expensive to make than the winter blend. Summer blend emissions are typically lower and the gasoline is optimized to work better at higher temperatures.

So at the moment, we’re experiencing a double-whammy of summer blend switchover costs and price increases from speculation due to threatened increased instability in the Middle East.

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