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Created: March 2, 2003
Latest Update: March 7, 2003
jeannecurran@habermas.org
takata@uwp.edu

Understanding Oil and Gasoline Prices

Site Copyright: Jeanne Curran and Susan R. Takata and Individual Authors, March 2003.
"Fair use" encouraged.

• March 7, 2003: How Gas Prices Work by Kevin Bonsor. A good primer to explain some of the terms you'll encounter on this issue. You might want to start by skimming through this piece. jeanne

• On March 7, 2003, the Wall Street Journal commented:

  "Worries over a war in Iraq, a cold winter, the lingering effects of a recent labor strike in oil-producing Venezuela and complications in the increasingly lucrative oil-refining business are having potent effects on gasoline supply. One result: For some big oil companies, the profits could be huge."
  Gas Prices Hit Record Highs In 16 States; Shortages Loom, By Alexei Barrionuevo. March 7, 2003, at p. A1. Requires subscription to read. Backup in our archives; not available online. Sorry, jeanne.

  As in most social and economic issues, oil and gas prices are complex. Mr. Barrionuevo gives us four principal causes for limits on our oil supply:

  • War with Iraq
  • Cold winter in the East, particularly
  • Labor strike in oil-producing Venezuela
  • Complications in the oil-refining business: summer gasoline with fewer pollutants emitted in heat of summer

  The list of factors affecting the supply of oil would seem to suggest that oil companies, refineries, are merely passing on the higer cost of crude oil in higer prices to consumers. But there is a value added problem here. "Value added" refers to production in which many people play a role in getting the final product to the consumer. In oil, there are those who refine the crude oil, those who prepare the special summer gasoline required in California where the summer heat increases the toxicity of polluted air, the distributors who get the refined gasoline to the stations that supply it to consumers. At each of these steps along the way there are workers, maintenance, cost of transport, costs of doing business. Thus each group along the way adds a little to the price to cover the value they have added in getting the product, gasoline, to the consumer. Whenever you have a long production and distribution process such as this, someone gets greedy, and adds a little extra to cover his/her contribution. This shows up when analysts look at each group's profit margins. And so we have the charges flying that dealers in the local station and refineries are reaping excess profits, or even "price gouging." (See Elizabeth Douglass and Nany Rivera Brooks comments in their L. A. Times article.

  Discussion Questions

  1. Do you know what "gouge" means? Is it a value-laden word?

     Consider that when you use value-laden words, words that suggest a positive or negative value, you should provide factual evidence first, so that your reader can agree or disagree with you.

     Merriam-Webster Dictionary Search:

  2. Do you know what "summer gasoline" is?

     "This spring, California is facing a new challenge in switching to a new gasoline blend that contains ethanol, a corn-based gasoline additive that is replacing MTBE as an emissions-controlling agent. For each gallon of gasoline, refiners use a smaller amount of ethanol than they did MTBE because ethanol is more volatile. As a result, the switch is reducing the overall California gasoline supply by as much as 10% at a time when the state can ill afford to be without."

     From Gas Prices Hit Record Highs In 16 States; Shortages Loom, By Alexei Barrionuevo. March 7, 2003, at p. A1. Requires subscription to read. Backup in our archives; not available online. Sorry, jeanne.

  3. Does the L.A. Times article on gas prices handle the value-laden aspect of "gouging" reasonably and ethically? Backup

     "The figures suggest that refiners — and dealers to a lesser extent — have been pocketing more money as consumers pay record high gas prices.

     "The logical conclusion is that their profits have increased," said state Energy Commission spokesman Rob Schlichting. "Whether that amounts to excessive profit or gouging — that remains to be seen."
     L.A. Times article on gas prices. Backup.

     Consider that "gouging" is offered as one alternative explanation, but not concluded until further evidence is available. That's a reasonable and ethical approach. The words that often get you out of trouble are "one reasonable explanation is . . . "

  4. Do you know the general history of the oil and gasoline dependency story?

     Consider this discussion from the Brookings Institute, Mr. Daniel Yergin speaking:

     "I want to set the scene a little bit by talking about energy security and energy issues. It always seems to me that the starting point for talking about energy security goes back about 90 years ago when Winston Churchill shifted the Royal Navy from coal to oil which meant instead of depending upon Welsh coal the Navy was going to depend upon oil from Persia, from Iran, which raised concerns for the first time about security.

     "Churchill at that time said the answer is that safety and certainty in oil lie in variety and variety alone. I think that maxim is one that continued to govern because it's really about diversification and it holds true at the beginning of the 21st Century even as it did at the beginning of the 20th Century.

     "Energy security concerns are front and center again for the first time since the Gulf crisis a decade ago. We're not in a crisis now by any means, and as I say these concerns are on the table and events demonstrate that with the end of the Cold War and the resolution of the Gulf crisis we passed into a decade of exaggerated confidence about security and that included energy security.

     "Why is energy security on the agenda again? First it's a perennial issue, the rising U.S. oil imports. Thirty-six percent in 1973 at the time of the first oil crisis; now over 50 percent. Secondly, the obvious, the turmoil in the Middle East in all of its dimensions in the war on terrorists. The third, market pressures. And the fourth is something that I think is new, a new concern in addition to the additional concerns about the flow of oil is that the security of our energy infrastructure has now become a central concern, part of the overall focus on homeland security."

     From Energy's Future: What Should Americans Know?

     . . . . .

     "The issue is not whether we should import oil but rather to avoid being in a position that makes us vulnerable to disruption. Unless we're able to imagine some draconian regulations or series of technological breakthroughs that are not now apparent, the practical question as opposed to the rhetorical question, does not revolve around substantial reductions in imports but rather about stabilizing them. And how to do that, although it's not always clear, I mean there is in fact no single answer, no single formula, conservation has a significant role. It's noteworthy that today the intensity of oil to our overall economy has declined by about half since the '70s. Stabilizing or increasing the oil production is also important. One will hear great pessimism, but in fact the Gulf of Mexico is an area of great growth, and new technologies are obviously going to be very very important.

     "Let me throw out, to contribute to the discussion, some principles for energy security. One is, and these are very common sense. One is to recognize that there really is only one oil market and that it's not just what happens to the U.S., it's the overall scene that matters. Two, Churchill's maxim of about 90 years ago about diversification certainly is the case today and has been an important element of U.S. oil policy since the 1970s.

     "Third, is that emergency stocks such as the strategic petroleum reserve are a front line defense against disruption, but I think it needs to be reminded again and again, particularly when the weather is cold or there are pipeline problems, that the value of reserves like the strategic petroleum reserve should not be devalued and undercut by turning them into market management schemes that confuse temporary hikes with a serious disruption."

     From Energy's Future: What Should Americans Know?

     And don't miss the joke that Mr. Gregg Easterbrook started the videotaped conference with. You'll have to scroll down just past Mr. Ronald H. Nessen's introduction.

  5. How does "global warming" impact the oil and gasoline situation?

     Consider the Gulf Stream and global warming:

     Start here: Global Warming Reports Sea Level Rise Reports. Government publications. Look to publications, and then to What to read first.

     "We're seeing huge freshening in the North Atlantic," says Mr. Gagosian. "The sinking of the cold, salty water has slowed 20% in the last 30 years." No one knows how much of a freshwater influx would shut down the Gulf Stream (this winter's big chill in the Northeast is not a sign that the current is weakening so much as a sneak preview of what climate would be like without it).

     But if the tipping point were reached, the nations of the North Atlantic could face a so-called little ice age in under a decade. Icebergs would lurk off Portugal."

     From Global Warming Could Mean Big Chill for Northern Regions . . . Backup Available only in our archives.

     If it's getting colder in the Northeast, if a glacier is floating outside of Portugal, what do you suppose is going to happen to our need for fuel oil? So then we'll have to throw that into the cost and limitations of crude oil, won't we?

  * * * * *

  Further Reading

• State Gas Prices Soaring Faster Than Cost of Oil By Elizabeth Douglass and Nancy Rivera Brooks, Times Staff Writers. March 7, 2003. Los Angeles Times, at p. A1. "Figures suggest that refiners are reaping larger profits. Sen. Barbara Boxer calls for an investigation." Backup

• Gas and the Economy: Rising gasoline prices likely to adversely affect other economic sectors by Andrea Lynn, Humanities Editor. News Bureau, University of Illinois at Urbana-Champaign. Backup

  • Regional Economics Applications Laboratory Papers on economic effects on our social infrastructure. Requires some sophistication in economics. Link added March 3, 2003.

• How Gas Prices Work Practical piece. Link added March 3, 2003

• .Energy's Future: What Should Americans Know? Sources, Dependency, Conservation, Alternatives, Environment National Issues Forum. Brookings Institute. Friday, June 21, 2002. Link added March 3, 2003.

• Economic and Security Implications of Oil Price Increases Statement before the Senate Committee on Governmental Affairs, March 24, 2000. Richard N. Haass, Vice President and Director, Foreign Policy Studies. The Brookings Institute. Link added March 4, 2003.

  Gasoline prices higher as demand climbs By Hil Anderson. UPI Chief Energy Correspondent. Link added March 5, 2003.