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Why Are Gas Prices So High?

Sept. 16, 2012
Personal Finance
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Wondering why gas prices are so high? You’re not alone. Gas prices are always a favorite topic of casual commiseration, and for good reason. With the price per gallon approaching (and surpassing) $4 on a nationwide level, drivers across America are growing more frustrated with every empty tank. For a select few, driving is leisure, but for most, it has become necessity. Getting to school, getting to work, running errands and maintaining any semblance of a social life require a car in most communities. Our dependence puts us at the mercy of the powers beyond our control. Here’s a quick overview of why gas prices are so high and what we can do to pump less and save more.

Why gas prices are so high

When it comes to gas prices, people love to point fingers. There MUST be someone at fault, a singular individual or particular group to blame for our hardships. Is it the president? Congress? Wall Street? Who’s driving this bus, anyway? As easy as it would be to nominate a scapegoat, the group at fault is none other than the human race–not only the governing bodies and business heads, but society and its participants.

The price of gas is determined by four main factors: the price of crude oil, refining, taxes and distribution & marketing. The price of oil accounts for 65-80% of the price of gas. The more oil costs, the more gas costs. So what determines the price of oil? One of the biggest factors is demand. Higher demand–and global demand is always on the rise–equates to higher barrel prices.

A second factor is global stability. Strife in exporting countries and friction in international trade place strain on the market by decreasing the available supply. At its core, the price of oil is dictated by simple supply and demand. Speculators also have a small hand in skewing prices. Investors trying to predict the future can bet oil prices up or down according to how they foresee the industry evolving.

So why are gas prices so high? Because oil prices are high. And why are oil prices high? Because global demand is on the rise (especially in Asia), conflict persists in exporting countries (especially in the Middle East) and investors are betting on higher prices yet to come.

Fighting high gas prices

On an individual level, saving money on gas is as simple as following several easy and fairly obvious steps. Believe it or not, the number one action you can take to increase your vehicle’s fuel efficiency is keeping your tires full. Proper air pressure can increase mileage by up to 3.3%. Make sure you exercise vigilant maintenance of your vehicle at all times. Fixing problems as they arise will insure your vehicles is operating at its optimal level. You can also boost mileage by 1-2% by using the manufacturer’s recommended grade of motor oil.

Of course, obtaining a fuel-efficient vehicle and modifying your driving habits are both great measures for reducing gas consumption, but they’re not always practical. A number of mobile apps and online tools can help you locate cheapest fuel options in your area. NerdWallet’s gas price tool, for example, allows you to search up-to-date gas station prices by zip code. Additionally, a good gas credit card can help curb the cost of driving by offering returns on gas station purchases.

On a larger societal and governmental level, there are a few options for reducing the money we spend on gasoline. Switching to an alternative fuel source is always on table but is easier said than done. Offering incentives for companies to produce fuel-efficient vehicles or subsidizing the cost to consumers could aid in boosting the nation’s fuel efficiency.

Some have suggested we tap into our Strategic Petroleum Reserve, which comprises nearly 700 million barrels of oil. While this could lead to temporary reprieve, it is by no means a permanent solution and could even translate to higher bidding prices. More domestic drilling is another frequent suggestion, but, as the U.S. makes a relatively small contribution to the global oil supply, more drilling on the home front would hardly make a dent.

For now, be a smart consumer, take care of your vehicle and fulfill your patriotic duty of complaining about gas prices that, compared to other countries, are actually quite low.