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Why Big Oil Is to Blame for High Gas Prices

Commodities / Gas - Petrol Nov 06, 2012 - 05:45 AM GMT

By: InvestmentContrarian


George Leong writes: While oil prices have fallen to the $85.00 level, the price of gasoline continues to be stubbornly high, and you can blame this on the greed of the big oil companies.

Despite the decline in oil prices, it still costs me over $100.00 to fill up my gas-guzzling SUV.

According to the U.S. Energy Information Administration (EIA), the price of regular gasoline averaged $3.57 per gallon across the U.S. as of October 29, which is still well below the historical average U.S. high of $4.11 per regular gallon reached on July 18, 2008.

If you live on the West Coast, the cost of gas is staggering, at an average of $4.04 per gallon.

In my view, the price of gasoline makes little sense at the current level. Again, blame the oil companies and speculators.

Go back to July 2008, when gasoline was at $4.11 per gallon. The World Texas Intermediate (WTI) oil prices at that time peaked at $145.00 a barrel, so the high gasoline prices at that time made sense. During the recession, WTI oil prices fell to $30.28 a barrel. On Monday, WTI oil was prices sat at $85.00 a barrel.

In my view, there is absolutely little connection between oil prices and gasoline; but then again, maybe I’m missing something? Perhaps the oil companies aren’t greedy, and it’s just a bad rap? The reality is that the government accounts for 11% of the cost of gasoline, with nine percent for distribution and marketing, 18% for refining, and 62% for the cost of the crude. (Source: U.S. Energy Information Administration, last accessed November 5, 2012.)

In other words, the oil companies are lining their coffers at the expense of the consumer.

With gasoline prices holding at the pumps, the jump in fuel costs will likely impact the disposable income of consumers at a time when consumer spending is under pressure.

There is some “price elasticity” for gasoline prices in the short term, as movements in prices tend to be “inelastic” since consumers minimally alter usage. In the short term, driving may be cut and the use of public transport will rise. There could also be a decrease in road trips, which will have an impact on the hospitality business, such as hotels and restaurants.

You could move to Venezuela where the government-supported oil prices have resulted in the price of gasoline at $0.18 per gallon. (Source: “Why do tax prices vary state to state? It’s not just taxes,” The Christian Science Monitor October 9, 2012.) However, I doubt many of you would go to this extreme.

Another alternative would be to push your government representative to increase the focus on alternative fuels.

Of course, the situation could be worse. Canadians paid a whopping average of around $5.09 a gallon. Gas prices in Europe are sky-high. Italy has some of the most expensive gas in the world at around $9.19 per gallon, which is probably why there are so many mopeds there. (Source: “Petrol Prices Around the World, October 2012,” MyTravelCost, last accessed November 5, 2012.)

The problem is that America is dependent on foreign oil to satisfy the country’s immense thirst for gasoline. The greedy oil-cartel Organization of Petroleum Producing Countries (OPEC) controls much of the world’s oil; it dictates global oil prices by adjusting its production quota when these ultra-rich oil tycoons wine and dine at their regular meetings. Gas prices in these OPEC countries are some of the lowest in the world, which shouldn’t be a surprise.

The reality is that oil prices must be controlled and gasoline prices should be regulated. Don’t open up the country’s oil reserves. The Keystone oil pipeline from the Canadian tar sands will help, but the environmental impact from oil sands oil is a major issue.


By George Leong

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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