Background & Facts

see also the skinny, pro & con, links

The United States is the world's largest gas guzzler, consuming 20 million barrels of oil per day, 25% of the world's total. We import 11.2 million gallons of which 2.4 million barrels (around 20%) comes from the countries in the Persian Gulf. The top five countries the United States imported oil and other petroleum products from in 2003 were Canada (17% of imports) Saudi Arabia (14%); Mexico (13%); Venezuela (11%); and Nigeria (7%). See our energy overview fact page for more stats on the energy we use.

In 2005, oil and gas prices surged to their all time highs - nearing $70 a barrel and $3 a gallon (MSN) - but then chilled out only to skyrocket back over $70 in 2006 and beat inflation-adjusted records of over $100 a barrel in 2007 (last set in '81 when oil would've been $80 a barrel and $3 a gallon in today's dollars). (USAToday and MSN) For the latest national average price of a gallon of gas see the EIA.

Pushing up the price of oil

Like any other product on the market, oil prices generally go up when either demand rises or supply falls. If supply keeps up with demand, there's no problem: prices stay fairly stable.

Experts don't entirely agree what's responsible for the recent peaks in oil prices - especially since, as some argue, supply is keeping up with demand. One explanation is that recent spikes in oil prices are just temporary supply scares that shouldn't cause too much long concern; the market gets nervous that short term regional problems - such as terrorist threats or hurricanes - will tighten supply, but that prices will normalize as the problems pass.

Others worry that we might be in for a longer price squeeze as world demand for oil puts an unusual strain on the oil market. The most noted example is China, where oil consumption could triple in the next 25 years (CNN). Some think we've reached our peak in supply already (they're known to use the term "peak oil") and that supplies will start falling soon, but oil experts usually disagree (Daniel Yergin being one of them).

Then there are those that say it's a little bit of both. Even though the oil industry can keep up with demand, it can only just do so; it no longer can keep a supply cushion (between what it produces and what it can produce) that has buoyed the market through earlier fluctuations. Without a cushion, when there are small scares in the oil and gas market - like political unrest in oil countries or hurricanes - the market freaks out and prices soar.

Note: Even though gas prices are connected to oil prices, they don't always rise and fall together. USAtoday and Slate explain how it's possible for gas prices to go down as oil prices spike. For the general relation between oil and gas prices see CNN/Money.

Highly recommended reading: for 61 pages of graphs, charts and an in-depth, but readable, explanation of what raises gas prices, go no further than this GAO report. Business Week also has a good extensive explanation of what's pushing prices up.

Regional gas prices

The price of a gallon of gasoline in the United States varies by region and state. A few factors add up to the final price of gasoline: local and national taxes, transportation costs, additives, lease or renting of the gas station, wholesale cost charged by the retail brand, wages, competition, etc. Gas station owners are also sensitive to local competition because customers are known to travel out of their way to save pennies per gallon. Large retailers often use gas prices as a loss leader (i.e. they will lose money on the sale of gas merely to attract customers to their stores). Another factor that affects prices are clean-air regulations, which mandate the selling of 18 different blends of gas (known as "boutique" fuels) across the country and so contribute to an increase in the cost of a gallon of gasoline.

Another price push? The New York Times reports that a recent rule change in additives may have also added a few cents to the cost of gasoline.

How to bring prices down

This is, of course, where opinions really start to splinter. A brief laundry list of some popular solutions follows:

• Increase supply - especially at home. If there's more oil from reliable source (that is, from the US), prices should come down. Two areas that the supply-side advocates often hope to open up are the Arctic National Wildlife Refuge and off shore reserves on the east and west coasts.

• Decrease demand. The opposite approach is to stem Americans' thirst for oil, particularly by requiring that cars guzzle less gas. Another way to do that is to:

  • Invest in alternative energy and new technologies. Hybrid cars, corn ethanol, (in the distant future) hydrogen cars, among others could all ease up our craving for oil.

• Ease up the refining rules. Environmental rules - including the boutique additives mentioned above - nudge up the price of gas by discouraging the building and expansion of refineries and complicating regional markets.

• Soothe the skittish markets. If price spikes have more to do with worries about supply than with what supply is actually available, the best a government can do is make the market less worried. Investing in security of oil supplies (pipelines, etc.) and keeping reserves ready to dispatch oil when crises pop up are a couple of ways to staunch possible adrenalin flows.

Or push them up?

With the US's continued fix on foreign oil and environmental pressure to move to alternative fuels, many economists advocates pushing gas prices up rather than down. The rationale is that taxes on fossil fuel will make alternative fuels more competitive and so encourage the private sector to move more quickly to develop alternative fuels. (WSJ)

Bush's 2006 & 2007 Energy Initiatives

In his February 2006 State of the Union Address, Bush surprised both conservatives and liberals in declaring that America had to wean itself off its "oil addiction," particularly to Middle Eastern nations. He proposed funneling funds into developing alternative energies. Distressingly to conservatives, he didn't make a new push to open up drilling in ANWR. Liberals were equally bummed that he didn't mention increasing gas mileage standards or a raising gas taxes. Also, although environmentalists like the talk about developing alternative energies, most weren't impressed with his budget recommendations; he requested $169 million more for biomass, solar, hydrogen and wind energy as well as $250 million for a global nuclear energy initiative, but he would also cut funds for geothermal and hydropower development by $518 million. (CongressDaily)

In his 2007 SOTU address, the president revisited similar themes, recommending that Congress vote to require 35 billion gallons of renewable fuels (biodiesel) be used by 2017, and to decrease projected gasoline consumption by 20% in 10 years. (cJ did a little math, using the EIA's numbers, to figure out that a 20% decrease in projected use means about an 8% decrease in gas use from today).

Energy legislation

See our energy bill trackers from 2006 and 2007 to get a handle of the slew of energy bills that - mostly - don't go anywhere in Congress.

Updated February, 2007

Did we miss something, let some slant slip in, lose a link - or do you just have something to say? Drop a line below! In the spirit of open dialogue, cJ asks you keep it civil, keep it real and keep it focused on the message, not the messenger. See our policy page for more on what that all means.