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    That pain you feel at the pump comes from more factors than you may think (coconut wireless, Flickr).

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    "Why does my gas cost so much?"

    It's a valid question, especially when gas prices fluctuate overnight for no apparent reason and TV news talking heads focus on it with the same energy as the health care debate. Some might say there's a good reason to be concerned, especially in light of a recent study by the U.S. Joint Forces Command that pointed to an oil shortage in 2015. A reasonable person has a right to wonder what's going on.

    The genesis for this story was the simple fact that I didn't have a clear idea of why we pay what we pay for a gallon of 87 octane. After reading this story, you'll have a much better understanding of how and why gas prices change, and what the future holds.

    The Billion-Dollar Equation

    Many factors contribute to the price of a gallon of gas. The good news is that, in general terms, the equation is simple. These are the four main components that determine the gas prices you and I pay:

    Crude Oil + Refining Process + Retail Sales/Distribution + Taxes = Gas Price

    These components, however, don't contribute equally to the gas prices at the pump. Here's a look at each component and its role in the retail pump price:

    • Crude oil -- 69%
      • Finding the crude oil
      • Getting the crude oil out of the ground
      • Transporting the crude oil to the refinery
      • Maintaining a reserve capacity of crude oil
      • Profit

    • Refining the crude oil into gasoline -- 6%
      • Producing special blends of gasoline to meet local clean air government regulations
      • Transporting the gasoline to the gas station
      • Profit

    • Selling the gasoline at a station -- 10%
      • Operational costs
      • Marketing costs
      • Profit

    • Taxes, federal and state -- 15%

    Source: U.S. Energy Information Adminstration

    Understanding Gas Price Swings

    Knowing the basic components of gas prices is a good start that makes understanding price swings easier. The two largest components of oil production are the most volatile. Many variables can interrupt the flow of crude oil and the refining process. Most gas price hikes happen in the wake of some kind of disruption in these two areas.

    Hurricane Katrina provided a textbook example of this. It wiped out major drilling operations and refineries on the Gulf Coast. Gas prices shot up because the balance between supply and demand changed. Katrina's wrath caused a significant drop in gasoline production, but demand stayed constant, resulting in higher gas prices in the U.S. and across the globe.

    In the months after Katrina, as the wells in the Gulf of Mexico and the huge refineries along the Gulf Coast came back on line, gas prices came down because supply increased to meet demand. Gas prices then moderated globally.

    While Katrina was an obvious reason for a gas price swing, other factors are harder to identify. If you live in a major metropolitan area affected by the Clean Act, you've likely already seen mild gas price swings. Why? Refineries serving your geographic area have to change their fuel blending process to produce the government-mandated "boutique" gasolines that help reduce vehicle emissions over the colder winter months. These changeovers temporarily reduce supplies, causing modest and short-lived price increases. As soon as the refineries are back up to capacity after the blend shift, prices edge back down. Maintenance at refineries and on oil pipelines can also temporarily reduce supplies, causing localized price jumps.

    What's Happening Now With Gas Prices

    Obviously, gas prices are generally higher than they used to be. If you were driving back in the 1960s, you were used to gas prices of about 25 cents a gallon. Adjusted for inflation, that works out to be about $1.63 per gallon today. However, adjusted for inflation, gas prices between 1984-2001 were even lower. Today, we're definitely paying more than we used to, with the national average around $2.86 per gallon. So what other factors are causing gas prices to rise?

    According to a report by BP Oil, worldwide demand for crude grew by 0.7 percent from 2005 to 2006, a rate that equates to almost 253 million barrels per year. Of some 60 countries surveyed by BP, demand was up in nearly 40 countries, while demand was flat or down in the other 20. For the record, United States oil consumption decreased in 2006 to below the levels of 2004.

    Against this reality of increased demand, especially from developing countries with huge populations such as China (demand up 6.7 percent in 2006), oil production has been fairly flat. Between the jump in demand and flat production, gas prices have risen.

    Several less obvious reasons are also behind jacked-up gas prices:

    • The crude oil that has been "the easiest to get" has already been pumped from the ground. Oil companies have to work harder to obtain oil they pump out today, and that costs more.
    • The quality of crude oil available now is generally lower, making it more expensive to refine than the more desirable "light sweet" crude that was more widely available in years past.
    • Supply uncertainty due to political issues in countries such as Nigeria, Iran, Iraq, and Venezuela, which in turn creates market nervousness. This tends to drive up prices from other oil producing countries because these suppliers can guarantee an uninterrupted supply. Some place the premium at $10 per barrel, but it's nearly impossible to quantify.

    Taxes drive gas prices up further

    As noted above, state and federal gasoline taxes account for about 15 percent of the cost at the pump. This figure equates to a national average of about 57 cents per gallon. As you can understand, states with percentage-based sales tax make considerably more on each gallon as gas prices rise.

    While paying nearly 60 cents per gallon in taxes is not great news, compared to many countries, we get off easy. The country of Turkey levies nearly a $5 per gallon tax on each gallon of fuel (this really seems like a "fine"). Norway, even with its oil industry, taxes its gasoline buyers about $4 per gallon. However, some countries enjoy little if any taxation. Most of these same countries also enjoy huge oil reserves and refining capabilities that have been "nationalized" by their governments. In Iran, gas is only 33 cents per gallon, while Venezuelans do even better, with gas as little as 17 cents per gallon. The trade-off, of course, is living under a totalitarian government.

    Is raising fuel taxes further the right thing to do to encourage alternative energy sources?

    No. Raising taxes will cause a non-market driven decrease in oil consumption. This decrease in demand will drive down the world price of oil, making it tougher for alternative energy sources to gain market share. Until alternative sources of energy are profitable to produce on an even playing field compared to gasoline, they won't get to market on a large scale. Many energy experts do not support raising taxes because of this economic reality.

    What about higher mandated fuel economy standards?

    Bob Lutz, GM's outgoing vice chairman, believes "if fuel efficiency is the goal, making it impossible for consumers to buy full-size trucks and SUVs because of mandated fuel economy standards won't help. This will hurt the economy and decrease the demand for fuel, causing lower prices, thereby increasing demand (for fuel)."

    Bob gets it. His point is that Americans should drive what they want until they decide the price of fuel is so important that it makes them choose a more efficient vehicle. If one assumes that gas prices will remain high, these elevated gas prices will encourage alternate energy development. Legislating larger vehicles out of existence isn't the answer. Hey Washington, are you listening?

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    1 - 20 of 1303 Comments
    EPS41USA Apr 03, 2011 3:35 AM
    I can't believe the American population is eating this nonsense. Gas prices are high because a select few are in control of it. They use false pretenses of oil shortages, and the effect of global warming. Where are all those people screaming when China is looked at for pollution? It costs less to make diesel, yet it cost more to buy. The select few are killing our economy because of greed and their desire to be in power. There is no shortage... the gulf proved it not to long ago by spewing out millions of barrels a day. Oil fields in the US are seeping oil from the ground. Canada has it in it's sand. The largest deposits in the world are in the western United States. It seems to me that the Arab countries have infiltrated the Democratic party . Yes the party that is keeping us from being self-sufficient. Do your research. They don't allow exploration, or drilling, and keep us buying foriegn oil. You want to make sure we keep our supply? Start replenishing river beds with trees and foilage... that's where the fossil fuels come from. The earth replenishes the oil supply with using those materials. Stop believing the lies, and start taking our country back.
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    NormanB63 Apr 02, 2011 4:46 PM
    The main reason Gas cost so much is because back in the 70's, the oil companys started inching up the price of Gas. Blamed it on not being able to refine it fast enough. The Goverment bought that outright lie, so then, the big Oil Giants found out they could get away with it and the rest is history. Everything we do these days is tied to oil. You name it and Oil has a finger in it. America will never see the gas prices we had in 1970 thru 1975. Those days are gone forever
    Report This
    RogerRobert1942 Mar 19, 2011 1:19 PM
    well
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    RogerRobert1942 Mar 19, 2011 1:17 PM
    why is it when i was a kid it wsa 25 cen. a gallen
    Report This
    RogerRobert1942 Mar 19, 2011 1:15 PM
    the truty is monery
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    Michaelmktg Feb 15, 2011 5:48 AM
    FAbernath ******* the nail on the head. The speculators are driving up the cost at the pumps and their practices should be BANNED.....The American people should rise up in protest...
    Report This
    FAbernath Feb 14, 2011 5:24 PM
    Conspicuously missing from this gas equation is speculation which drives the price of commodities sky high. I think wall street speculation on essentials like gasoline, food, etc should be banned.
    Report This
    FAbernath Feb 14, 2011 5:24 PM
    Conspicuously missing from this gas equation is speculation which drives the price of commodities sky high. I think wall street speculation on essentials like gasoline, food, etc should be banned.
    Report This
    bwps440 Nov 11, 2010 8:43 PM
    The Fed just monetized US debt, creating a devaluation of the dollar, which raises prices on everything. Take look at your groceries this week. It's not just gas, it's everything.
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    keith1257 Oct 18, 2010 1:48 AM
    i think your a lier americans r not driving that much any more an it's still going up see i have worked 4 towing companys on the river an i have also worked at a sirvice staion too just like in the 80's we have penty of oil an hell carter singed the salt t. an was giving oil away too other countrys . go drill in ms in the delta penty of oil.i'm not that dummy, so get back with me soon keith stephens
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    drewslinger61 Aug 06, 2010 7:01 PM
    WELL GEORGE HERES AN EDUCATION FOR YOU.IF YOU THINK 24 MPG IS GOOD THEN YOU MIGHT BE A GOVERNMENTAL FOOL ALSO. I OWN A 1984 SUPRA. A SPORTS CAR FROM YES JAPAN. IT GETS 25 ON THE HIGHWAY WITH THE AC ON AT 125 MPH. NOW WHY CANT CARS TODAT MATCH THIS?? YOU GOT IT GOVERNMENT. ANOTHER TIDBIT. IN 1980 I BOUGHT A DODGE MARADA. 318CI. MILAGE AROUND TOWN 12MPG,HIWAY 15.TOOK IT IN FOR A EXHAUST MANIFOLD LEAK WHEN IT WAS 3 MONTHS OLD. MAN WAS GETTING HIS IMPERIAL WORKED ON. HE WAS GETTING 80MPG.YAH I KNOW SOUNDS IMPOSSIBLE. SO I ASKED RU SURE? HE SAID YES HE PUT 1 GALLON AND TRIED AND THATS WHAT HE WAS GETTING. DODGE CALLED DETROIT AND THEY MADE HIM TAKE IT OFF. IT WAS A CARBEURATER. THAT WAS EXPERIMENTAL AND OUR GREAT GOVERNMENT DIDNT WANT US HAVING IT. AND THIS IS WHY GAS COSTS SO MUCH
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    drewslinger61 Aug 06, 2010 6:53 PM
    DO YOU PEOPLE REALLY BUY THIS???REASON GAS IS HIGH IS THE GOVERNMENT WANTS IT TO BE. YEARS BACK AN IDIOT PREDICTED GAS GOING OVER A BUCK A GALLON. BREAD AT A BUCK A LOAF. BEFORE THE IDIOT ALL MIGHTY BUSH TOOK OFFICE IN 2000 GAS WAS 125 FOR HIGH TEST. INFLATION HASNT TRIPLED SINCE THEN. I KNOW MY WAGES HAVENT EITHER. GET RID OF GOVERNMENT ,TAKE OVER MIDDLE EAST AND WALLA. WE SAVE LOADS OF MONEY AND LESS CRIME ALSO. AND THE PERSON WHO WROTE THIS IS PROBABLY EMPLOYED BY GOVERNMENT
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    hgeorgech Jul 23, 2010 3:44 PM
    It's amusing to read why people think gasoline is so expensive when many of them pay $1 or more for a 16 oz bottle of water! However, let's look at gas prices ... 50 years ago (yes, I can remember then), regular gas in upstate NY was 28 cents a gallon - give or take 1 or 2 cents. At that same time, the minimum wage was 80/85 cents per hour. So, for an hours' work (at minimum wage then), one got approx 3.0 gallons of gasoline. Most folks making minimum wage now (fast food/service jobs) are earning $7.50 - $8.50 (depending on state/city). Today, I paid $2.62/gal for regular gas ............... so, that is almost exactly the same ratio of gas prices vs. minimum wage as it was 50 years ago! NOTE: 50 years ago, a Coke or Pepsi out of the machine was 10 cents ... if you can find one now for $1.25 you're doing good! The daily newspaper in '60 was 5 or 10 cents! Bottom line ... not only have gas prices remained relatively stable (vs. minimum wages) for 50 years, cars/trucks generally get far better gas mileage now than they did in 1960! That '60 Impala got about 17-18 mpg on the highway; today's model easily gets 27-28mpg! Gas prices aren't the problem ... think about it!
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    rbob20 Jun 23, 2010 4:05 PM
    why is gas going up 34 cents a gallon , while oil is going down ? in ind.
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    carlwcol May 15, 2010 9:08 PM
    Addendum - Remember, when Clinton was president, gas was under $2.00 a gallon. How do you spell relief? START with D-E-M-O-C-R-A-T. And remeber, President Obama has a lot of crap to clean out of D.C, from Bush/Cheney, (or should I say CHENEY/Bush)? Give him time, and give him support !!!!
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    carlwcol May 15, 2010 9:00 PM
    Okay, I'm tired of hearing about European countries paying more at the pump. Why the sudden jumps in The Bush/Cheney administration? The U. S. State Dept. makes deals for our benefit. One is with India, where Indians can come to the U. S. and buy businesses @ very low, federally-backed (somehow) mortgage rates . IN EXCHANGE, India gives us much cheaper rate on oil. Fine with me. We have other such deals, done ethically w/ friendly nations. So why does it go up so much, and why always just in time to ruin our vacations???
    Report This
    ncnusbaum2 May 06, 2010 9:41 PM
    THIS WHOLE LETTER IS A BUNCH OF CRAP PAID FOR BY THE OIL COMPANIES. THE VERY SIMPLE ANSWER IS "GREED" AND "YOU" WHO KEEP ELECTING THE SAME POLITICIONS OVER AND OVER AND OVER WHO ARE PAID BY OIL COMPANIES TO KEEP THE STATUS QUO. VOTE OUT ALL INCUMBENTS EVERY YEAR...... THIS WILL ALSO GET RID OF THE $$$$TRILLIONS SPENT ON PORK THAT YOUR INCUMBENTS GET EVERY YEAR.
    Report This
    leighj490 Apr 29, 2010 3:44 PM
    BULL ****
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    kountrysu Apr 28, 2010 11:35 PM
    Gas prices jump up 20 cents in one day. It use to just jump up higher for the weekends or holidays. I just don't understand this bullcrap. Guess we'll all be driving around in tuna can cars so we'll be able to buy food for our familys and get to work. Thanks Obama.
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    bad9iron Apr 28, 2010 10:00 PM
    After all the drummed up reasons for escalating gas prices are given it is easy to see that the oil industry has prepared a set of standard answers that simply reflect their day to day operating procedures. The real reason the price fluctuates so widely is directly related to the amount of speculators in oil futures. These speculators create artificial demand for oil that is based on certain assumptions that are used to increase fear and uncertainity in the market place. In today's world terrorists can disrupt the supply of oil that may or may not cause short term shortages or interruptions. This type of event causes panic in the market that speculators use to cause price increases. This psychology once started can get out of control and lead to severe price spikes. But as we have experienced the last few years these spikes end as high prices curtail demand. This practice will end when more speculators lose than make money. The public has the power to control this problem but must be disciplined enough to do so.
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    If you're shaking your head at high gas prices, read this article to find out what goes into the price of gas.
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