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| Author: | Lee Hudson Teslik, Associate Editor |
|---|
May 4, 2006
The Economist aptly summed up U.S. attitudes on the matter: "Americans are being ripped off at the pump! 'Greed-heads' are manipulating the market and gouging the little guy! Something must be done!" Heading into the busy summer season, when Americans typically take to the roads on summer vacations, gasoline prices are hovering around $3 per gallon. Those are the highest prices since the post-Katrina spike, and they are expected to rise even more. Blame has flowed in all directions. Republicans fault Democrats for years of resisting Alaskan drilling; Democrats fire back that Republicans are in cahoots with big oil. Energy corporations draw fire for executive pay packages and alleged price-gouging. In turn, the companies say they are every bit as beholden to global market factors as the American consumer. For all the politicking, sifting through the relative influence of these factors is a complicated proposition. The price Americans pay for gasoline has a number of components: the price of crude oil; the costs of mining and refining it; the costs of federal and state taxes; the costs of corporate marketing and distribution; and the various profits taken along the way. Each element has its fluctuations and its relative importance, and each varies in the extent to which it can be manipulated by government policy.
The Energy Information Administration (EIA), an arm of the U.S. Department of Energy (DOE), breaks the price of retail gasoline into four basic components: the cost of crude oil; federal and state taxes; the cost of refining; and distribution and marketing expenses.
Given the extent to which the price of crude oil affects the price of gasoline, any fluctuation in the world's crude market can have a significant impact on the gasoline market. In 1960, many of the world's largest oil suppliers formed an organization through which they could coordinate production and ensure consistent supply, thereby providing stability in an otherwise very volatile market. This group, called the Organization of Petroleum Exporting Countries (OPEC), now oversees over half of the oil supplied in the world. By coordinating production and output, OPEC wields heavy influence over the market price of crude oil.
Critics have blamed the organization for "squeezing supply" by limiting the amount of oil that is drilled and refined, thus keeping crude prices high at the expense of the world's oil importers. But others have argued that the only way to compel oil suppliers to bolster their output is to allow crude prices to rise, thereby providing the incentive for increased production capacity. Leonardo Maugeri, an executive at the Italian energy company ENI, recently wrote in Foreign Affairs that this is already starting to happen: "As market forces have kicked in, high prices have already started to generate more investment, which will boost both production and refining capacity in the future. In other words, high oil prices are a painful but necessary cure for the disease that has affected the oil market for about twenty years."
It is important to add that other factors, some out of OPEC's control, have also affected supply. These include political instability in major oil-producing nations, particularly Iraq, Iran, and Nigeria; concerns of terrorist attacks on pipelines and production facilities; and even the weather. Hurricanes Katrina and Rita, for example, caused a significant and painful price-spike in the United States. In this article, CFR's Senior Fellow in International Economics Roger Kubarych examines the market effects of oil shocks.
In addition to restricted supply, the world's oil market has experienced a recent spike in demand. This has raised the price of crude, and thus in turn the price of gasoline. The spike is a result of increases in demand in the United States, the world's foremost energy consumer, and of explosive growth in the oil needs of major developing nations. In 2004, China displaced Japan as the world's second largest oil importer. India and Brazil also have emerged as major oil consumers. These new markets have only exacerbated upward pressure on the price of crude. China's energy needs, and its efforts to explore new oil markets, particularly in Africa, are examined in this CFR Background Q&A.
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