Demand down, oil price down … so why are gas prices still high?

BY AARON BROM

aaron.brom@ecm-inc.com

American drivers and others in the world have done their share.

When gas prices skyrocketed in the past four years, they curbed their demand for the precious resource of oil. Automakers responded by making cars more energy efficient.

People are riding their bikes more, and are carpooling and/or taking the bus. They are walking to the store instead of driving. The price of oil subsequently dropped substantially as demand went down and supply went up.

Which then begs this most obvious question: If the price of oil has gone down 42% in the past four years, why has the price of gasoline not gone down even close to 42%.

Remember in 2008, during the Oil Crisis? The price of oil topped off at $145 dollars per barrel and the national average subsequently topped at $4.12 per gallon. The math problem I’m having is that, if gas is $4 per gallon when oil is priced at $145 per barrel, how can gas be $3.79 per gallon as it was the weekend of June 15 and 16, 2012, when the price of oil keeps sinking (about $83 per barrel when this was written).

By my estimation, if the price of oil is tied to the cost of gas, today’s gas prices should be at about $2.50 max. What about inflation, or the value of the dollar? Yeah, what about it, can that explain why gas still lingers near $4 per gallon when the oil price is almost half of what it was during the 2008 crisis? That would be a lot of inflation and dollar devaluation.

Of course those of you astute enough to follow this topic might read about all kinds of reasons gas/oil prices go up: Iran nuke crisis (turbulent Middle East), hurricane season, refinery fires, higher summer demand, greedy speculators, refining higher cost heating fuel, OPEC supply cuts … on and on.

Problem I have is, for all these reasons it goes up, when the opposite happens we don’t see prices go down proportionately. As recalled here, the link between the price of oil and the price of gas must not be as direct as economists would have us believe, or we would be paying way under $3 at $83 per barrel.

The gas equation is nutty enough that when people start to really whine about it, the government attempts to come to the rescue. Analysts said it was bad news for President Obama when prices went high, as he’s likely to take the blame. Yet former Florida Gov. Jeb Bush – son of one president, brother of another and no Obama ally – was recently quoted saying basically there is nothing a president can do.

So what can be done? I’m not an economist but it seems oil producers are having a hey day. We are giving billions of dollars in tax breaks to the big oil companies, which are making more profit than ever (more than $1 trillion in profits in the last decade).

Ending federal subsidies to the fossil fuel industry would be a huge step, but it will be hard to enact politically. On March 29, 49 senators voted to keep subsidies for oil companies.

They had received nearly $26 million in political contributions from Big Oil.

High gas prices hurt us all. Consumers have responded and have curbed demand. It’s time the oil companies respond and lower the price of gas. Politicians need to represent the people who voted them into office, not the oil companies pouring millions into legislative coffers.

Simply put, if the higher cost of oil leads to higher gas prices, then the lower cost of oil should lead to lower gas prices – proportionately.

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