Why Are Gas Prices So High?

The prices at the pump are edging up again. So, why are gas prices so high and can we expect any relief given the economic conditions around the world?

Gas is a love/hate subject for many Americans. We continually complain about gasoline prices, but of course we need gas to get around in our cars. When gas prices go up dramatically like they did in early 2008, the shock to our collective system can be massive. Just about the only silver lining of the economic meltdown around the world was the massive drop in fuel prices. Unfortunately, they are on their way back up.

So, why are gas prices so high compared to only 10 years ago? Consider the year 2002. Gas prices nationally averaged under $1.20 a gallon nationally that March. The last two years have seen the prices go as high as $5 a gallon in some places with current prices hovering around $3 a gallon nationally. As the economy improves, prices are expected to go up.

So, what is the cause of all of this? There are two primary reasons and a caveat. The primary reasons break into a short term cause and a long term version. The caveat has to do with the impact of the economic turmoil. Let’s take a look at each of these issues and how the impact us.

2008 saw gas prices shoot up at an unheard of rate. This was due to the fact oil went from $70 a barrel to over $140. Gas is obviously made from oil, and the impact was seen at the pump. Still, what caused the problem? The answer was not really a supply issue. Instead, it was an investment cause. Oil futures are a type of commodity. They can be traded on a commodity market much like stock for Google can be traded on the stock markets. Investors started putting money in oil futures to offset losses in the value of the dollar. As the prices started to rise, people saw a good thing and money flooded into the oil markets. This created a short term hike in gas prices that was based purely on speculation. That ended when the economic mess came to fruition.

There is no mistaking that gas prices have been rising over the last 10 years. They’ve easily tripled over this period. The reason again is oil. The problem is supply and demand. Approximately 84.5 million barrels of oil are produced everyday world wide. The demand for oil world wide is about 84 million barrels. As demand starts to surpass supply, the prices start going up. The problem is the growth of countries like China and India are causing increases in demand.

Are we running out of oil? Yes and no. We are running out of oil that is easy to find and transport from the ground to the pump. We are finding oil in shale and deep in the ocean, but the cost of getting it out of the ground and to the pump is high. This is why prices in the long term will continue to rise, perhaps dramatically.

And the caveat? The recent economic troubles have presented us with a classic case of supply and demand. When things turned bad, the speculators got out of oil. The prices dropped back to $70 a barrel, but then kept dropping. The price got down below $30 a barrel, which was shocking. Demand was simply way down and remains so. This is why gas prices went from very high to very low and are no starting to move back up as demand picks up a bit.

Why are gas prices so high? There are short and long term reasons. Prices will move up and down a bit in the near term, but will generally rise over time as demand continues to grow across the world.

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