The steep rise in fuel prices over the years has put financial strain on people all spherical the world. Last yr, the annual average gas price stood at $3.60, breaking all previous data. The domestic consumption in US has been low up to now few years, partly due to the aging child-boomers, and partly because of the affect of the sub-prime crisis. A decreased consumption should ideally result in a fall in the worth of a commodity, but with gas prices, it has been the opposite. This is one of the explanation why most people find it tough to fathom the rationale for the high worth of gasoline. In the next paragraphs, we are going to try to understand the elements that cause gasoline costs to extend.
What we Pay for a Gallon
Crude Oil: 64%
↓Refining Prices and Income: 12%
↓Distribution, Advertising, and Retail Costs and Profits: Thirteen%
Although now we have seen a lower within the consumption of fuel in US, rising markets equivalent to China and India have pushed the demand for crude oil. The truth that these two countries account for approximately 35% of the global population explains the reason for top demand for gasoline in these countries. In response to statistics, China consumes about 9,000,000 barrels of gasoline on a regular basis. India, on the other hand, needs three,182,000 barrels each day to fulfill its power needs. Although these countries do not export crude oil to US, the demand they create in the worldwide oil market will increase the probability of a value hike, notably by the Group of the Petroleum Exporting International locations (OPEC).
Dominance of OPEC
OPEC holds the lion’s share in global crude oil manufacturing. Their economies are extremely dependent on the earnings generated by exporting crude oil to the world. To sustain their economic system, OPEC intentionally decreases the manufacturing of crude oil, causing oil prices to extend. Economic system isn’t the only motive OPEC appears at, politics additionally plays an essential function in determining what it does with its vast reserves of oil. This was demonstrated in 1973, when the OPEC quadrupled oil costs for the US and Europe on account of their help to Israel within the Yom Kippur Battle. Drastic measures had to be taken to counter the unprecedented occasion including gasoline rationing and implementation of 55mph velocity restrict. The aftermath was a steep enhance in the inflation and unemployment levels across the US. The 1973 Oil Embargo made the world conscious in regards to the dependence of oil prices on the policies of OPEC.
Political Unrest in Center East
Center East has been politically unstable previously decade or so. The Iraq warfare, the Arab Spring, and the threat of a nuclear Iran – all these components have resulted in decreased oil manufacturing. Hypothesis has additionally elevated in the oil business on the status of Middle East as a credible oil-exporting area. Libya, which produced 2% of the worldwide crude oil in 2010, witnessed a civil war which affected its manufacturing capability drastically. Iran, which exports 2.2 million barrels of crude oil on a regular basis, has been in the news for the previous couple of years for its nuclear program. The issue continues to be unresolved and hypothesis about the future of commerce relationship with a nuclear-armed country has led to an increase in the costs.
Hike in Refining Cost
Lately, refining crude oil within the US has develop into expensive. Consultants have cited two most important reasons for this: Congressional mandates resulting in shifting in the direction of the production of extra environmentally clean gasoline blends, and the oil refineries on the Gulf Coast being shut down by Hurricanes Katrina and Rita. Together with refining costs, oil firms are cautious about new upgrades on existing refineries (a brand new refinery hasn’t been constructed in the US since 1976), all of which has resulted in tightening the supply lines, even as the demand for oil has skyrocketed.
Oil Wells Drying Up
The primary disadvantage of fossil fuels is that they are exhaustible; neither can they be replenished (not for one more few million years), like batteries, nor are they perpetually accessible, like the solar or the wind. Heavy extraction of natural gas reserves everywhere in the world has led to what some have called ‘peak oil’, the purpose of most extraction of oil. This has brought about panic among some oil firms and buyers, leading to an increase in gas prices.
Fall of the Greenback
The value of dollar is inversely proportionate to the worth of oil. Thus, if the greenback depreciates, the value of oil shoots up, and vice versa. Oil is traded in dollars within the international market. If the dollar depreciates towards a international foreign money, the identical amount of oil becomes available at a lesser prices within the international foreign money. For example, consider that a barrel of oil costs $a hundred — equivalent to about 76 euros. In easy terms, if the dollar loses (or the euro positive factors) its value, lower than 76 euros would make up $a hundred. Thus, while greenback-paying countries will purchase a barrel for $100, euro-paying international locations might want to pay lesser quantity. Most countries are fast to money in on the depreciated greenback by shopping for extra oil in their own currency. These fluctuations additionally contribute to the excessive prices of gasoline.
The excellent news for Individuals is that the decline in oil costs may proceed in 2013, and the costs won’t go as excessive as they had in the final yr. Irrespective of the fluctuations in the worth of gas costs, we have to remember that the oil reserves world wide are non-renewable. To ensure that these reserves usually are not fully depleted, makes an attempt ought to be made to develop different sources of energy. Signing off, we hope that this text helps you in understanding the underlying causes of high gas prices.