Good Question: Why Do Gas Prices Fluctuate So Wildly?
MINNEAPOLIS (WCCO) – The first two months of 2013 have not been much fun at the gasoline pump. Prices keep rising, changing all the time.
Gasoline is the only thing we buy with a giant changing electronic price sign on the street. It’s the only product where the price retail consumers pay changes so often.
But why is it so volatile?
“Because the cost of making it is volatile,” said John Felmy, the chief economist for the American Petroleum Institute, a lobbying group that works on behalf of oil producers, refiners and some retailers.
According to the Department of Energy, 72 percent of the cost of gasoline is crude oil.
“There’s three big reasons why crude oil is going up. China, China and China,” Felmy said.
He also added massive worldwide demand and limited supply increases to that list.
According to one Chinese news report, 53 million private cars were registered in all of China in 2012, which is a 22 percent increase over the previous year. Clearly there are more cars on the road, more gas tanks, more demand.
However, that demand, while climbing, isn’t swinging as violently as the retail price does on a daily basis.
It’s the crude oil price swinging wildly. Crude Oil trades on a global market, like a stock.
“We have an incredibly competitive market,” Felmy said.
The market has five large oil companies fighting it out for market share. In 2012, those companies combined to profit more than $100 billion.
But how much of the price swings can be blamed on speculators?
“I think very little is speculator,” Felmy said.”If the price is artificially high, what you should see is inventories build up. And they haven’t been. What that tells me is we’re at the market price.”
Oil companies, clearly, want to maximize profit.
“Remember these companies are publicly owned. In fact, 500,000 people in Minnesota are members of pension funds that are invested in oil companies,” Felny said.
But is there a moral line where the oil companies say: Aren’t, we making enough money?”
Felny answered with a question: “Why should they do that when their shareholders need that money for their retirement?”