Within the past decade, gas has become a power player in the American economy. When the price of gas nearly quadrupled within the span of a few short years, our entire economy felt the effects. But why is gas such an important item in our economy? What caused the recent spike in the price of gas? Who’s to blame? Exactly how far does our economy feel the effects of a gas price hike? The Gas Economy By: Matt Myers
How Much Do We Actually Use?
Americans alone drive nearly 3 trillion miles each year.
This is roughly 800 trips from the sun to Pluto and back.
The United States consumes about 20 million barrels of oil products per day.
About 40% of that is automobile gasoline.
American dependency on gas renders it one of the most important commodities in our economy.
Many even use gas prices as an indicator of the health of our general economy.
Gasoline is a liquid that is derived from petroleum, or crude oil.
Crude oil is a naturally-occurring commodity found in rock formations that is thought to have resulted from the decay of animal and plant fossils.
Where Does Gas Come From?
The Crude Oil Market
Top 5 Oil-Producing Nations:
# 1 Saudi Arabia : 12.1%
# 2 Russia : 11.6%
# 3 United States : 10%
# 4 Iran : 4.8%
# 5 China : 4.4%
OPEC is the largest player on the Crude Oil Market.
OPEC is an collection of 13 oil-producing nations. It is responsible for 33.3% of the world's oil production and holds over 66.6% of the world's oil reserves
How the Price of Crude Oil is Raised
The price of crude oil can be raised at the whim of the oil-producing nations.
When the oil-producing nation or group of nations (usually OPEC) wants to raise the price, it will reduce the level of production at its oil refineries. This decrease in supply automatically causes a sharp rise in the price of crude oil.
Because gas is derived from crude oil, the incline in the price of crude oil causes a direct incline in the price of gas.
Even the possibility of a reduction in the production of crude oil can lead to an incline in the price of gasoline.
Why did the price of gas rise?
In 1999, the average price of gasoline in America was $1.71 per gallon. It was considered high for the time, and Americans began to wonder what would happen should it rise any further.
A decade later, our nation has seen gas rise to over $2.35 more than the price Americans considered “high”, to a national average of $4.06 per gallon.
Since the gasoline market is dictated by the laws of supply and demand, we often look to those factors to see what caused the price hike.
The largest factor in the price rise is the recent increase in gasoline demand in the industrializing nations of China and India.
The second most commonly accepted reason for the hike is the sheer desire of OPEC, sparked by their monopolization of the oil industry, to raise the price of crude oil by decreasing production and thus supply.
Where Does Your Gas Dollar Go?
It would surprise many Americans to know that what they pay at the pump isn’t solely for the gasoline.
Here is how the average dollar spent on gas is eventually split up:
Taxes: 11 cents
Distribution and Marketing: 6 cents
Refining: 10 cents
Crude oil: 73 cents
Effect of high gas prices
Since the tremendous hike in gas prices over the past few year was followed shortly by a recession in our general economy, people often wonder about the relationship between low gas prices and a healthy economy.
The reality is that it does, indeed, have an effect on many other areas of our economy.
Gas is used to transport many goods and services used in our everyday lives. A hike in the price of gas also means a hike in the price of virtually any product on the market, reducing consumer spending.
When gas prices peaked at $4.06 in July of 2008, it discouraged needless driving.
This decreased the demand for gasoline, which in turn, lowered the price.
"OPEC." Wikipedia . 2009. Web.5 Jun 2009. <http://en.wikipedia.org/wiki/OPEC>.
"Oil Production by Country." Nation Master . 2009. Web.5 Jun 2009. <http://www.nationmaster.com/red/pie/ene_oil_pro-energy-oil-production>.
"How Gas Prices Work." How Stuff Works . 2009. Web.5 Jun 2009. <http://auto.howstuffworks.com/fuel-efficiency/fuel-consumption/gas-price.htm>.
"How Gas Prices Work." Gas Prices Are Too High . 2009. Web.5 Jun 2009. <http://gaspricesaretoohigh.com/prices.php>.