What determines gas prices?
Someone who works in the oil industry sent me this today. It's a more easier to understand explanation as to what determines gas prices.
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There are four components to gas prices. Crude oil futures, refineries/distributors, taxes, retail. Simplified, for the US a rule of thumb is this breakdown:
Crude oil about 50%
Taxes about 30%
Distributors about 10-12%
Retail about 8-10%
In some places taxes are much higher, and believe it or not, some retailers sell gas at cost to sell other items. It is the price of oil futures that drive the price of gasoline. It is important to understand that oil companies, the government or any other entity can't determine oil prices, only influence them. The price of oil is determined by the market in oil futures as determined by the commodities market. A little over a year ago, oil was trading between $28-32/barrel. I am showing $68.71/barrel right now, so that is where your price increase in refined gasoline comes in.
Why does it go up? Well, there are so many factors that it is impossible to say one thing. Supply and demand is oversimplified in this case. The most recent spike was obvious because 25% of the refinery capability is in the area hit by Katrina. Other causes are the emerging market in China, increasing demand, but mostly refinery capability. Refinery production has been running nearly 96% for years, and no new refineries are being built due to legal exposure from enviromental lawsuits. I know of no serious investor that considers there to be a supply problem in terms of crude oil. In terms of current oil production:
Saudi Arabia: 10.4 million brls/day
Russia: 9.4 million brls/day
United States: 8.7 million brls/day
The US is third largest producer of oil, and the majority of its reserves have not been tapped.
Why does gas goes up on gas already purchased? The reason is that gas sold is priced at what it will take for each subsequent load. It is the commodities traders that determine the price, along with the taxes both federal and local.
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I want to add that Louisianna is our largest oil refinery area. We are going to run short. Supply and Demand will cause the price to rise. Better think of ways to conserve....especially people who use it for winter heating. It's going to be a long year.
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