The Truth about Gas Prices

The Truth about Gas Prices

by: Andrew McIndoe
September 29, 2005


The wake of hurricanes Katrina and Rita left many Americans questioning the recent increase in price and shortage of gasoline across the nation. Days after Katrina and Rita struck the oil-laden Gulf Coast, many consumers found themselves lining-up at gas stations hoping to fill-up before the station ran out of gas or prices skyrocketed to an even higher price. People panicked because of the constant media hype that focused on the storms affect on gas prices and left many people spending their savings to fill up their cars. Some credit card companies are blaming a spike in payment delinquencies on the high cost of gasoline. (Aversa 1) No one saw an end in sight to the everyday escalating prices and people wanted answers. Fingers were being pointed at everyone from the President, to the oil companies and gas stations themselves.

If you are an American who drives an automobile or purchases gasoline, there are a few things you need to know about the recent increase in gasoline prices. Before complaining that prices are too high, it is important to examine the rate of inflation, supply and demand, and also federal and state regulations and taxes that cause prices to rise.

Before any assumptions are made about today’s high cost of gasoline, it is important to ask relative to what. After learning that the average cost of a gallon of gas in the 1930s was 25 cents and in the 1950s was only 30 cents, many Americans cry foul at this weeks (September 26, 2005) average gasoline cost of $ 2.76 per gallon. (Energy Information Administration) But before we automatically assume that gas prices are outrageously high, it is important to take into account inflation that has occurred since 1950. Using an inflation calculator to compare the value of the dollar, what cost 30 cents in 1950 costs $2.33 in 2005 and thus gasoline prices today are only slightly higher than they were in 1950. Up until the recent spike, gasoline prices have been considerably lower than 1950 prices. The average price per gallon of gas in August 2005 was only $2.23. (Energy Information Administration) With inflation factored in, that is the exact same amount gas would have been in the 1950s. Factoring in the rate of inflation is not a technique most people normally employ when analyzing the price of gas today. While inflation does play a significant role in determining whether or not gas prices are historically high, recent spikes in the prices and the reasons and forces behind them must also be investigated.

The basic economic principle of supply and demand affects gas prices daily. According to the Federal Trade Commission, “Gasoline prices rise if it costs more to produce and supply gasoline, or if people wish to buy more gasoline at the current price – that is, when demand is greater than supply.” (iii) In the days following hurricanes Katrina and Rita the American gasoline and petroleum industry experienced a supply crisis, not a drastic increase in demand. Because the hurricane shut down two of the largest pipelines supplying gas to the East Coast, the supply drastically fell 80% while consumer demand stayed the same hence the price increased. In the height of the crisis, gas prices peaked during the week of September 5th, 2005 at an average cost around the nation of $3.03 per gallon for unleaded regular. Consumers in New York experienced the highest average of $3.40 per gallon and consumers in Minnesota experienced the lowest cost per gallon of $2.86. (Energy Information Administration) Allowing supply and demand to perform its valuable function in our economy was vital to keeping law and order during crisis. Although it takes some time, allowing supply to equate with demand is in the best interest of our capitalist society.

State and federal environmental regulations along with taxes also influence the price of gasoline. Throughout the last few decades, both state and federal gasoline taxes have increased significantly. In fact, 18% of the total cost of a gallon of gasoline is in the form of taxes. Gasoline is one of the most taxed commodities in America and consumers pay the price. (Energy Information Administration) The Federal Trade Commission reports that, “the retail price of gasoline depends in part upon how much tax a state levies on it. Higher gasoline taxes drive up the final price of gasoline. In 2004, the average tax was $0.225 per gallon, with the highest state tax at $0.334 per gallon (New York).” (111) Not only do taxes influence the cost of gas, but other miscellaneous government regulations pump-up the price. Stricter environmental policies and quality standards have been enacted within the last ten years which not only make oil harder to refine, but adds to the overall cost suppliers have to pay in order to meet all the necessary standards. While the quality of gas has improved and the pollution output decreased, these policies add to a higher price at the pump.

It is important to examine outside factors that contribute to the high cost of gasoline before making any false assumptions about whom or what is at fault. Basic economic principles such as inflation, supply and demand, and high taxes and strict government regulations are all important when investigating the rising cost of gasoline. The economic affects of hurricanes Katrina and Rita should open the eyes of American consumers and should shed light on the real reasons behind gasoline prices.

Works Cited

Aversa, Jeannine. “Overdue Credit Card Bills Hit Record High.” www.ap.org 28 September 2005. 28 September 2005. =AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2005-09-28-20-47-51>

United States. Energy Information Administration. “Gasoline and Diesel Fuel Update.” www.eia.doe.gov. 26 September 2005. 27 September 2005. < http://tonto.eia.doe.gov/
oog/info/gdu/gasdiesel.asp>

United States. Federal Trade Commission. Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition. Washington DC. 2005.