The High Cost of Driving: Why Gas Is So Expensive

Find out why world events and the law of supply and demand aren’t the only realities driving the high price of gas.

If you drive, you’ve no doubt wondered why the cost of driving is so high … probably every time you fill up.

And if (like us) you’ve ever researched the forces behind high gas prices, you’ve undoubtedly found a ton of proposed reasons for the occasional spike. But how do you know which, if any, to believe?

We thought we’d review some of the most popular opinions on why the cost of gas is so high and cite some expert opinions on each.

Wars, natural disasters, and other catastrophes drive gas prices up

How world events affect gas prices

Click to enlarge!

Of all the explanations for high prices at the pump, this one’s a perennial favorite. And when you compare fluctuations in gas prices to the timing of major world events, it’s hard to deny that there must be some kind of connection.

In the graph above, it’s clear that several world events may have contributed to rising gas costs. The beginning of the Iranian Revolution in 1978, for example, might have had a lot to do with the slow but precipitous spike that culminated just before and after the beginning of the war between Iran and Iraq.

The months before 1991’s Operation Desert Storm saw another, though more modest, spike. Additionally, the U.S. war with Iraq, hurricanes Katrina and Rita, and the recent Libyan revolution have each caused their own sharp jumps.

But other events, like when the Organization of the Petroleum Exporting Countries (OPEC) scaled back production in 1998, seemed to do little to change gas prices. And that leads us to another popularly cited cause for high fuel prices.

Gas prices are determined by supply and demand

Supply and demand for gas

Click to enlarge!

The law of supply and demand is fundamental to economics, and it’s at work in determining gas prices: simply put, the relationship between the amount of an available resource and the demand for that resource determines the resource’s price.

In other words, when supply is high and demand is low, the price is low. As demand rises and supply falls, the cost goes up. And if demand should ever surpass supply, the costs will skyrocket.

At present, there’s no reason to anticipate a significant drop in demand for gasoline. Demand’s been rising quickly and steadily since the early ‘80s, despite ongoing shortages of drilling platforms, engineers, refining facilities, and even oil fields themselves. The U.S. military’s 2010 Joint Operating Environment (a report that outlines potential national security threats), predicted that “as early as 2015, the shortfall in output could reach nearly 10 million barrels per day.”

So, as demand continues to rise and supply drops, we can expect further increases in price in the coming years. Which is one of many reasons some people are so excited by new sources and methods of extraction like shale gas, bio-energy, and hydraulic fracturing (often called “fracking”) — all of which could make the United States energy self-sufficient by 2035. Others, however, warn that the dangers of fracking are no better than those related with more traditional oil extraction methods.

Next week, in Part II of our “Why Gas Is So Expensive” series, we’ll check out how futures trading can affect what we pay at the pump. Read Part II now.

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