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The US has been experiencing a gas price surge for quite some time. The increase affects virtually every aspect of society, given that today’s world relies heavily on oil. There are various aspects responsible for the rise in gas prices, some of which are unique to the US despite the country being the largest producer of the same commodity. These aspects affect the supply and demand of gas, including the price of crude oil and refining costs.
Price of Crude Oil
The significant aspect of the shift in gas prices is the price of crude oil. It accounts for 54% of the overall cost of a gallon of gas at the pump (World Economic Forum, 2022). Fundamental economic principles pertaining to supply and demand impact oil prices since oil futures are traded on a global market. The price of crude oil is also susceptible to a range of issues, including geopolitical instability in source regions. Even though the US produces the most oil globally, it imports a large quantity (Loh, 2022). Thus, an issue in the supply chain directly leads to an increase in the cost of the refined product. In addition, the ongoing conflict between Russia and Ukraine impacts the supply and, thus, the overall cost of gas in the country. The dispute affects the prices in several other ways. For instance, since Russia, a key oil producer, has been heavily sanctioned following its invasion of Ukraine, it has had no choice but to reduce the quantity of its production, which leads to a reduction in quantity in the global market (Koeze & Krauss, 2022). It is also not to mention the fact that OPEC, which Saudi Arabia leads, has a say in the quantity of oil production, which ultimately affects the supply (World Economic Forum, 2022). Therefore, OPEC has historically been blamed for having a hand in the fluctuation of oil prices on the global market by limiting production.
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Cost of Refining
The cost of refining crude oil is also a major aspect of fluctuating prices at the pump. It specifically accounts for approximately 14% of the price at the pump (Loh, 2022). The refining capacity of the US has lagged for a long time. While the oil demand has been on a steady rise over the years, the refining capacity has stagnated, not to mention that a number of refineries were set up to refine oil that comes from outside the US. These events imply that calls to increase production by President Biden have not had the intended effect as prices remain stagnated and are expected to increase further soon. The refinery capacity problem of the US is expected to exacerbate in the future, leading to much higher prices unless the US makes adjustments in the same. An important point to note on the capacity aspect is that the last new refining facility to be built in the country was built in 1977 (Loh, 2022). This point clearly indicates a discrepancy between production and demand, given the increased demand since the refinery was built. America needs to keep up with the need for some sort of sustainability to be established. Therefore, it would be recommendable to establish new refineries that can refine American oil instead of relying on imports that increase the price even further. The capacity problem has been exacerbated by additional unpredictable issues, including the onset of COVID-19, which significantly slashed the limited number of refineries’ production capacity. While this did not impact during the pandemic owing to the fall in demand, it affected demand as the economy started to return to normalcy (Stevens, 2022). It is especially so due to a reduced available workforce and some refineries switching to refining alternative fuel types, including biofuels. Such aspects have affected the price of the pump significantly.
In conclusion, America has been experiencing a steady increase in gas prices for a few years. This issue pertains to several factors. Some of the most crucial include the cost of crude oil in the global market and the price of refining the oil. Though the US is the largest producer of oil in the world, it relies on imports to ensure it has enough supply of petroleum products. The fact that it imports oil increases its susceptibility to price fluctuations, given the possibility of issues pertaining to supply. Such issues include political instability in the supply countries. The other aspect is refining capacity. America relies on refineries built long ago despite increased demand over the years. It is also not to mention several vital refineries that are not set up to refine American oil. Therefore, various changes must be effected if America is to meet its demand and address the inevitability of constant price increases.
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- Koeze, E. & Krauss, C. (2022). Why gas prices are so high. The New York Times. https://www.nytimes.com/interactive/2022/06/14/business/gas-prices.html
- Loh, P. (2022). Fuel prices in 2022: The factors that matter. FOLEY. https://www.foley.com/en/insights/publications/2022/08/fuel-prices-2022-factors-that-matter
- Stevens, P. (2022). Rising fuel costs are a massive problem for business and consumers — Here’s why they’re so high. CNBC. https://www.cnbc.com/2022/05/19/fuel-is-a-problem-for-business-and-consumers-why-prices-are-so-high.html
- World Economic Forum. (2022). Explainer: What drives gasoline prices? World Economic Forum. https://www.weforum.org/agenda/2022/06/explainer-what-drives-gasoline-prices/