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Gasoline PricesIn Brief

Rising Gasoline Prices
Why are Gasoline Prices Rising? More expensive crude oil is driving up gasoline prices.   Historically, as crude prices have increased, so have gasoline prices. The reverse is also true. At $94 per barrel of crude oil (2011 Jan.-Mar. average), refiners spend over $2.20 for the amount of oil needed to make one gallon of gasoline. That $2.20 represents the largest component (more than two-thirds) of the pump price. Taxes add an average of another 48 cents a gallon to the price. Refining the crude oil, storage, delivery and retailing further add to the cost of producing gasoline.

Global economic recovery is increasing demand for oil as unrest in Mideast puts supplies at risk.     The price of crude oil is set by supply and demand in the global marketplace. Rising crude oil prices are an indication that a recovering world economy is increasing demand for more energy around the globe. While growth is concentrated in Asia and the Middle East, U.S. demand for gasoline is also growing, increasing an average of 4.1 percent from January to March 2011 (API estimates). With the worldwide economic recovery underway, demand is on the rise again as unrest in the Mideast has put supplies at risk. This combination of rising demand and reduced supply is helping to push prices higher.

U.S. refiners are producing at or near record levels.  This year U.S. refiners produced record amounts of gasoline and distillate fuel oils for March and for the first quarter (Jan.-Mar. 2011, API estimates) while domestic crude production slipped by 0.2 percent in the first quarter of 2011 compared with 2010.

U.S. producers are pumping less oil.  U.S. crude oil producers are pumping less oil this year than last year. The Energy Information Administration (EIA) says expected delays in near-term projects increase uncertainty about future investment in offshore production and lowers estimates of future production. These delays are attributed in large part to the drilling moratoria and the changes in expected lease sales off the Pacific and Atlantic coasts.

Address the problem with more supply and greater efficiency.      Increased oil production tends to decrease crude oil prices, thus reducing the cost of producing gasoline, diesel, aviation fuel and other crude oil products. While we cannot control overseas crude oil production, we can develop our own ample oil and natural gas resources— but only if the government cooperates. More U.S. oil and natural gas development would create hundreds of thousands of new jobs, generate billions in more government revenues and cut the trade deficit. Government should grant access to more public lands on a timelier basis because developing oil fields takes time. Waiting until the economic recovery kicks in and energy demand rises puts consumers at risk. Greater efficiency–more vehicle miles per gallon–is also part of the solution.

Taxing the industry more won’t help; earnings are reasonable.    Over the last five years, industry earnings have been in line with U.S. manufacturing industries, averaging just 7 cents for every dollar of sales. Oil and natural gas companies pay an effective tax rate of 41.1 percent, compared to 26.5 percent for all other S&P Industrial companies. More taxes would deter domestic investment and thus reduce potential production.

Increased production would produce higher government revenue than would higher taxes.   A new study from Wood Mackenzie found that from 2011 to 2025, negative economic consequences of higher taxes will, in the long run, more than offset any short-term gains in tax revenue. More important, the study shows that increased access and development of domestic oil and natural gas resources would create an additional half million jobs by 2025.

May 2011