High Gas Prices—So What?

oil pricesI just went to the gas pumps and was shocked it cost $100.00 to fill up my gas-guzzling SUV, but that is the price I’m stubbornly willing to pay for the comfort of a larger vehicle.

Call it sticker shock. The price of regular gasoline averaged $3.92 per gallon across the U.S. as of March 26, according to the U.S. Energy Information Administration (EIA), which is approaching the historical average U.S. high of $4.11 per regular gallon on July 18, 2008.

And, if you live on the West Coast, the cost is staggering at an average of $4.23 per gallon.

Yet, in my view, the current price of gasoline makes very little sense at the current level. Think back to July 2008 when gasoline was at $4.11 per gallon. The WTI oil prices at that time peaked at $145.00 a barrel, so the high gasoline prices make some sense. During the recession, WTI oil prices fell to $30.28 a barrel. Today WTI oil prices are at $102.78 a barrel as of March 30.

There is very little connection between oil prices and gasoline, but, then again, maybe I’m missing something. Perhaps the oil companies aren’t greedy and it’s just a bad rep? The reality is that the government accounts for around 11% of the cost of gasoline, with five percent for distribution and marketing, 12% for refining, and 72% for the cost of the crude. In other words, the oil companies are lining their coffers at the expense of the consumer.

With gasoline prices surging at the pumps, the jump in fuel costs will impact the disposable income of consumers, but the actual impact on spending has not been proven to be affected. There is little “price elasticity” for gasoline prices in the short term, as movements in prices tend to be “inelastic,” because consumers minimally alter usage. In the short term, driving may be cut and the use of public transport will rise. There could be fewer summer road trips, which impacts those in the hospitality business, such as hotels and restaurants.

One option is moving to Venezuela, where the government-supported oil prices result in the price of gasoline at nine cents per gallon. I doubt many of you would go to this extreme.

You could also push your government rep to increase the focus on alternative fuels, which I discussed in High Oil Prices Mean Profiting From this Kind of Play.

Of course, the situation could be worse. Canadians pay a whopping average of around $5.00 a gallon. Gas in Europe is sky-high. Italy has some of the most expensive gas in the world at around $9.27 per gallon, which is probably why there are so many mopeds there.

The problem is that America is dependent on foreign oil to satisfy the country’s immense thirst for gasoline. The greedy oil cartel Organization of Petroleum Producing Countries (OPEC) controls much of the world’s oil and dictates global oil prices by adjusting its production quota when these ultra-rich oil tycoons wine and dine at their regular meetings. Gas prices in these OPEC countries are some of the lowest in the world, which shouldn’t be a surprise.

The reality is that oil prices must be controlled and gasoline prices should be regulated. Don’t open up the country’s oil reserves. The Keystone oil pipeline from the Canadian tar sands will help, but the environmental impact of the oil sands is a major issue.

For now oil prices will continue to be controlled by OPEC…and this is obviously not good (just ask your wallet!).