Why are gas prices increasing?

I'm often asked this question by friends and family. I sometimes answer them by reminding them of the little sign that pops up in the local coffee shop from time to time. It usually says something like, "Due to a poor coffee bean harvest, the price of coffee beans has gone up." So your morning cup of coffee will cost you a few pennies more. We throw an extra nickel or two on the counter but usually don't think twice about it.

Gasoline prices really aren't much different. The main ingredient, crude oil, is traded on the same commodity exchanges that those coffee beans are. And when demand for any commodity is greater than supply, the price goes up. As you see in the news, many oil producing countries are facing an uncertain future. Unfortunately, those concerns translate into higher crude oil prices. In fact, oil prices have tripled since 2000. Then, adding complexity, refined gases and other fuels are also commodities trades on the same floor as coffee and crude oil.

Demand for gas in the US and Canada has continued to grow despite the fact that refineries across North America are running flat out. While there is no shortage, there is little room in the system to meet the excess demand. In short, that is largely why the price of gasoline has gone up in the past few years. But instead of putting a little cardboard sign on the counter announcing the price, we think it's important to put the price on the big signs out front.

Well it may be hard to believe but there's a lot more money to be made selling a cup of coffee than by selling a liter of gasoline. That bigger profit makes it easier for the coffee shop to absorb increases in the price of coffee beans than for crude oil. But think about it, has the price of your morning cup of coffee ever gone down?

1 comment:

acp said...

Actually, oil prices were still stable at 25$/barrel even up until Sept. 2003. According to NYT columnist R. Cohen, there were no experts that would have even predicted a four fold increase of the price per barrel of oil AFTER the US invasion of Iraq. But the incredible instability of that country, combined with increased consumption has driven the price up 5 fold.