Monday, August 15, 2011

Why Does Gasoline Cost So Much

We're all affected by gas prices: sometimes it seems like the oil companies are just gouging us. The truth is very different. Refiners have to buy the crude oil that is the feedstock for gasoline, diesel, jet fuel and other products. One of the main reasons the price of oil is high is that OPEC restricts the amount they produce. Oil is traded freely in every major market in the world, and the price is determined by simple supply and demand. OPEC limits the supply of oil to keep the price high: they sell fewer barrels but earn more money per barrel.

OPEC had the world over a barrel when they first formed their coalition, but as the price of oil rose, entrepreneurs in the West developed methods of finding and producing new and difficult reservoirs. The 2 trillion barrels of bitumen in Alberta as well as other vast reservoirs are economical to produce at today's prices, so OPEC can't effectively drive the price any higher. They can still affect the price of oil, but they aren't the only supplier any longer. Still, oil is the feedstock of gasoline and so gas prices will continue to rise and fall as oil prices do. Oil producers are in fierce competition with each other, in a continual effort to drive down their operating costs. As long as their entrepreneurial spirit is allowed to thrive in a free market, they will continue to improve efficiencies and find new ways to produce oil at lower costs-which of course will translate into greater supply and lower prices.

Another major factor in the price of gasoline is taxes: federal, state and provincial taxes make up a significant portion of the price you pay at the pumps. There's not much you and I can do about OPEC, but there IS something we can do about taxes. Let your politician know that you want lower gas taxes! But you have to be willing to give something up, and one thing we can give up is ethanol. Ethanol, contrary to its supporters claims, increases CO2 emissions and oil consumption, and we're being forced to pay for it! If you want to know more, read Kids Before Trees   and check back here for frequent updates.

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