Gas Prices: Going Up, But How Far?

Not until 2006 would gas prices approach that 1981 peak. Finally, in 2007, prices set a new record, not only in current dollars, but with inflation figured into the comparison. Since then, at-the-pump costs have grown steadily, passing the $3 and $4 marks. By July of 2008, the national average price stood at $4.10 and rising (up from $3.61 in early May and $3.01 a year earlier).

Crude Facts
Now, as in the past, the U.S. is largely at the mercy of OPEC, which produces 43 percent of the oil consumed in America. On an average day, the U.S. uses 20.6 million barrels of oil, says Robert K. Kaufmann of Boston University, and imports 60 percent of it. Kaufmann advises that rises in crude oil prices follow essentially the same path as increases in gasoline prices.


As late as 1974, a barrel of oil sold for under $10. The price rose moderately after the first oil crisis, then sharply in 1979-80, topping $35 a barrel. Then, it began to ease, dipping below $15 in 1986. Steep hikes started in 2004, and a barrel averaged $64 during 2007. The average topped $100 by March 2008. Early in July, the crude oil price hit $144 a barrel.


Retail gas prices, then, reflect two primary factors: (1) the price of crude oil; plus (2) basic supply and demand. The Energy Information Association estimates that the cost of crude oil accounts for about 73 percent of gasoline price. Federal tax amounts to 18.4 cents per gallon, and state taxes averaged 21.5 cents per gallon in 2007. Because they're charged as a fixed amount per-gallon rather than as a percentage, taxes constitute a smaller portion of the total as the price goes up.


As demand declines, Kaufmann explains, producers slow down their refining and sell oil that's already stocked. That tactic leads to a slower price drop. One barrel of crude oil yields almost 20 gallons of gasoline.

Production Factors
Guy F. Caruso, Administrator for the Energy Information Administration (EIA) believes oil prices are likely to remain high at least through 2009. OPEC production decisions, the EIA suggests, will continue to influence the market. The Department of Energy does predict decline in oil prices over the next decade, based on production increases in both OPEC and non-OPEC nations.