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Why are gas prices spiking?

by WayneTimes.com
November 28, 2021

Bottom line...Supply and Demand!

It is no surprise that with the number of vehicle per household, the United States uses more gasoline than any other nation in the world.

On Tuesday (11/23) President Biden ordered the release of over 50 million gallons of oil from the nation’s strategic reserves. Five other nations, including China, got on board tapping their reserves in an effort to moderate the price of oil worldwide.

Why? The simple answer is drivers/voters are especially prickly about gas prices, probably much more than the price of eggs or milk. The national average retail price of gasoline was recently at $3.40 for a regular gallon, up from roughly $2.11 at this time a year ago.

No doubt the swift increase of 61%, over 12 months, is rocking the public energy boat. In an often-used political, tactic, Republicans lay the gas price increases at the Democrats’ feet, but the price at the pump has little, or nothing to do with who is in the White House.

During the COVID pandemic, drivers drove less. So much so that big oil companies cut back on production, some shuttering processing plants and lowering prices in an attempt to get drivers motivated.

When the states and overall country began opening up, trains, planes and automobiles began churning the pumps. Demand for all refined petroleum products like gasoline,

diesel and jet fuel has caused a temporary lack of supply since it takes time to fill the pipelines.

So, what goes into the cost of gas? Oil prices have spiked due to demand. It is projected that COVID saddled-homebodies were expected to hit the roads over the Thanksgiving family gatherings. A projected 48.3 million people over Thanksgiving, according to the American Automobile Association, nearly 4 million more than last year are hitting the roads, though still short of pre-pandemic 2019 levels.

The price of crude oil is the main determinant of the price of gasoline. The price of oil has risen from all time lows during the height of the pandemic. Once causing jitters and cut backs in production at $50, the current cost has risen to $80 per barrel.

Global markets determine the cost of crude oil.

After oil is purchased, big oil companies process the liquid gold with either ethanol, or a host of other additives, all of which have increased in price over the past year and a half.

Then comes distribution and marketing. A shortage of truck drivers nationwide has added to the dilemma.

Now add taxes. It is estimated 17% of the price at the pump comes from the government’s piece of the pie. The federal government takes 18¢ right off the top. State taxes on gasoline vary from state to state, with the average coming in at about 30¢. That is why prices at the pump vary on news reports.

So, what effect will

opening the nation’s reserve have on the cost at the pump?

Prior to Tuesday’s announcement, gas prices began to retreat, but it takes time, sometimes more than a week, for the chain of supply to reach the pumps.

What most people do not understand is that many retail gas outlets are a type of franchise. About 95% of retail gasoline outlets are independently owned small businesses, but many fly the flag of a major oil company because they have paid a fee to license that brand. If they buy gasoline at one set price, it may rise, or fall drastically over a few days, but they are stuck with the price the day their tanks were filled. That is why there may be a fluctuation in prices from one station to another.

Some states have suggested temporarily cutting the state portion of gas taxes, most definitely a short term solution, but one that makes political points with drivers.

With geo-politcal transitions from gas powered vehicles to electric, or hydrogen, markets will continue to fluctuate for the foreseeable future.

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