WHO GETS THE EXTRA MONEY?

It's a complex question. It's not like Exxon buys a barrel of oil, refines it, and then delivers it the next day with a close link between cost to buy and price sold. Oil can take months to go from crude to gas station. Also, the prices you see mentioned per barrel are not actually the prices people are paying, but the price they are entitled to buy a barrel for - if they buy it ( a "future option"). Often they just sell the option or even a purchase to someone else for more or less money later. Most oil prices are not driven by people who actually purchase oil for delivery.

Eventually the higher prices translate to more money in the pocket of those supplying the crude. The people along the way in the food chain don't _usually_ make a lot of extra money as prices rise. However, when the gas station owner raises prices by 25 cents on gas he already paid for at the lower price within the last few days, he rakes in the money. Eventually his wholesale cost catches up with him and his profit margin is reduced. He may lose later on if prices drop (not happening much lately).

But, if you want to feel ripped off, take a look at the domestic oil production situation. Exxon (to pick an oil company) pumps gas (oil) from domestic wells in the South of the USA. It costs a certain amount to get that oil refined into gas and to the gas pump where we buy it. Exxon was making money off the wells they own when gas was $1/gallon. Now they have the same costs, and gas is $3.50 per gallon.

These sorts of situations are one reason the five major oil companies made $126b in profits last year. Remember to support GWB and his efforts to make sure the special tax breaks these folks get are not repealed - that wouldn't be fair! Oh, and while you're getting pissed off at GWB, don't forget to notice that the crashing value of the dollar has global investors fleeing dollars and investing in oil - driving oil prices higher and higher even as the dollar is worth less and less. See GWB for that problem too (it has to do with a $3T deficit and endless spending with no way of paying for it except borrowing from other countries (further devaluing the dollar).

Your friendly US government

If the govt. reduced it tax by 50% on a gallon of gas it would be a bit over

2 bucks a gallon

"Your friendly US government

If the govt. reduced it tax by 50% on a gallon of gas it would be a bit over

2 bucks a gallon"

Say what? Fed tax on gas is $.18 per gallon.

The gouging is occurring in the commodities market. Middle men drive up the cost through competitive bidding on "futures" that is to say, oil that will be pumped in the future. They guarantee to pay a fixed price and sellers then sell to them at that price. They in turn sell to the refiners. What's happening is that refiners keep a 30-60 day surplus in storage. This was purchased at the previous lower price. When speculators drive the future price up, the refineries re-adjust their cost to dealers and reap the windfall.

Hot Topic: What's Up With Gas Prices? Student Reading On April 14th 2008, the national average price for a gallon of regular gasoline reached a new all-time, inflation-adjusted high of $3.37. But people are driving less and oil supplies are increasing! Decreasing demand and increasing supply should lower the price of gasoline; so why are gas prices rising? Is it the election? A conspiracy? Price gouging oil companies? Or might supply and demand still have something to do with this mystery?

Before the new records set in March and April of 2008, the highest historical price for gasoline was in May, 1981 when the average price was $1.36/gallon. In today?s dollars, that?s the equivalent of $3.22. While gasoline and oil prices have reached and passed the highs of the ?80s, they?re high for different reasons. Read the excerpts from two articles below for a comparison between the factors influencing gas prices then and gas prices now.

Gas prices strike all-time high (CNNMoney.com, March 31, 2008)

Average gasoline prices have hit another all-time high, according to a survey conducted for motorist organization AAA. The average price of regular rose to $3.287 a gallon, up from $3.286 the previous day, according to the AAA Web site. The price averaged $3.165 a month ago. A year ago, American drivers were paying $2.673, according to AAA. . . . Analysts say surging crude prices are largely to blame for pricey gas. Crude topped $100 a barrel in early 2008, and has traded above $100 for most of the year.

While gasoline prices have hit record highs well before the start of the summer driving season, most analysts expect prices to peak relatively early - somewhere between $3.30 and $3.80 a gallon - and then decline during the second half of the spring as a slowing economy crimps demand. SOURCE LINK

Oil Prices Pass Record Set in ?80s, but Then Recede (by Jad Mouawad, NY Times, March 3, 2008)

Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output. The rising prices of the past decade failed to dent global economic growth as consumers absorbed the higher costs. Even now, with the United States economy slowing markedly, the trend has not slowed much. Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East. Still, today?s record is markedly different from the energy crises of the

1970s and 1980s. These were brought about by sudden interruptions in oil supplies, such as the 1973 Arab oil embargo, the Iranian revolution of 1979, or the outbreak of the war between Iran and Iraq in 1980.

Also, the United States economy at the time was much more dependent on oil than it is today. The amount of oil needed to increase economic output by $1 has dropped by 25 percent since 1990.

In the early 1980s, energy accounted for about 8 percent of disposable income in American households. As the economy became less energy-intensive and prices declined, that share fell under 4 percent in the early 1990s.

But as prices keep rising, the share of energy spending has been increasing. It reached more than 6 percent of household disposable income in December.

SOURCE LINK

Since the year 2000, increasing demand for gasoline, mainly from Asia and the United States, has lead to rising gas prices. An increase in demand (shift of the demand curve to the right) means that consumers are willing and able to buy more gas at any given price. However, according to the Dept. of Economic Analysis, demand for gasoline has actually decreased by 1% since January. When demand decreases, or (shifts to the left ? see graph below), the equilibrium price and quantity decrease. Why then, are prices still rising?

Economists and analysts think that commodities markets, gasoline futures contracts, and the exchange rate may have something to do with the rising prices. Because of news reports on ?the Dow?, most of us are aware that investors buy and sell stocks in markets like the New York Stock Exchange or the NASDAQ, but we may not realize that investors also buy and sell futures contracts for commodities such as iron ore, gold, sugar, crude oil, and gasoline. Every day billions of dollars in commodities are bought and sold on the floors of commodities exchanges like the Chicago Board of Trade (CBOT) or the New York Mercantile Exchange (NYMEX). As buyers and sellers interact, commodities prices change, and those changes can affect the price we pay for gasoline at the pump.

A futures contract is an agreement to buy or sell a commodity at a prearranged future date and price. The basic purpose of a futures contract is to provide price-change protection. For example, a farmer estimates that it will cost $2 a bushel to produce his wheat. Rather than run the risk that the market price for wheat will be less than $2 at harvest time, he can enter into a contract now to deliver the wheat at harvest time for a price of $2.50. At the same time, a food processing company may want to enter into a contract now to receive the wheat for $2.50 rather than run the risk that the market price at harvest time may be higher than $2.50.

However, the buyers and sellers of the actual commodities are not the only players in the futures market. Speculators buy and sell futures contracts, but have no desire to own the actual commodity; they see the possibility of price change as an opportunity for profit. A speculator who anticipates a commodity price increase will buy a futures contract now with the hope of selling it at a higher price later on. On the other hand, a speculator who anticipates that a commodity price will decrease, will sell a contract he doesn?t own (a practice called selling short) with the hopes of being able to buy it back at a lower price.

Contracts are bought and sold many times over before the contract date when the actual commodity must be delivered. In fact, the Chicago Board of Trade estimates that only four percent or less of what is traded, actually gets delivered as businesses attempt to manage risk and speculators attempt to profit by anticipating price changes.

A final piece of the puzzle of rising gas prices in a time of falling demand is the exchange rate. In order to trade goods and services with other countries, businesses must first exchange currencies. Currencies are bought and sold in the foreign exchange market and the term exchange rate refers to the price of one currency in another ? or how much of one currency it takes to buy another currency. If it takes more and more dollars to buy one euro, then we would say that the dollar is depreciating relative to the euro and the euro is appreciating relative to the dollar. The articles below refer to a ?falling dollar? which, in general, means the dollar is depreciating relative to other currencies. Sometimes this is also referred to as a ?weak dollar.? That means foreign investors can buy more dollars for less of their own currency. And then, rather than just holding those American dollars and watching them lose value as the dollar falls or inflation decreases the purchasing power of the dollar, they can invest in things for which they expect the price to rise faster than inflation? like gasoline or crude oil futures contracts.

Read the following excerpts and pay close attention to the role that commodities markets, futures contracts, and exchange rates are playing in the rising gas price saga.

Gas Prices Near Records, Following Oil (by John Wilen, Associated Press, March 10, 2008) . . . Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling. . . . Many investors believe the greenback is likely to keep falling as the Fed continues to cut [interest] rates. Many analysts believe the rise in crude prices is not supported by the market's underlying fundamentals, noting that supplies are generally rising while demand is falling. "By gobbling up everything in sight, [investors] are pushing food and fuel prices to ruinously high levels," said Peter Beutel, president of the energy risk management firm Cameron Hanover, in a research note. SOURCE LINK

Good Question: If people are driving less, why do gas prices keep rising? (by John Wilen, Associated Press, March 21, 2008) Q: If people are driving less, why do gas prices keep rising? A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January. Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall. This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: from investors. Contrary to the views of many conspiracy theorists, gas prices aren't set by refiners or gas stations as part of a campaign to gouge consumers. Prices are a function of the open market, as manifested in the trading of futures contracts on the New York Mercantile Exchange, or Nymex.

Nymex gasoline futures have been rising, following oil, despite growing supplies of both commodities. Blame the falling dollar, which has made dollar-denominated oil contracts irresistible to foreign investors and to any investors looking for a safe haven for their money during a turbulent time in the stock market.

This buying by investors has pushed oil futures to a series of records in recent weeks, and the rest of the energy complex -- which includes gasoline futures -- has followed.

Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit -- and may cut back even more drastically as gas gets more expensive -- it might be some time before prices start responding to lower demand. SOURCE LINK

Questions for Discussion:

a.. What caused the high oil prices of the early 1980s? a.. What explains the general rise in oil prices from 2000 to 2008? a.. Despite the decrease in demand and the increase in supply, what explains the recent and continued rise in gasoline prices since January,

2008? a.. If the Federal Reserve continues to enact expansionary monetary policy (i.e. ?the Fed continues to cut rates?), what impact do you think this will have on the value of the dollar relative to foreign currencies? How would that impact futures contracts for crude oil and gasoline? And how would this impact gasoline prices? a.. Markets are dynamic. There is constant pressure on supply and demand from all directions. Identify some variables referred to in these articles that could increase the demand for gasoline. Decrease? (Optional: Use a graph to illustrate each of these changes in demand on the equilibrium price and quantity of gasoline.) a.. What are some variables referred to in these articles that could increase the supply of gasoline? Decrease? (Optional: Use a graph to illustrate each of these changes in supply on the equilibrium price and quantity of gasoline.) a.. If the supply of gasoline increases at the same time demand increases, what can you say for sure about equilibrium price and/or quantity. (Optional: Use a graph to illustrate your answer Teacher Guide to Discussion Questions

1) What caused the high oil prices of the early 1980s?

The ?energy crises of the 1970s and 1980s . . . was brought about by sudden interruptions in oil supplies, such as the 1973 Arab oil embargo, the Iranian revolution of 1979, [and] the outbreak of the war between Iran and Iraq in 1980.?

2) What explains the rising oil prices from 2000 to 2006?

A rising demand world-wide for oil. ?Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East.?

3) Despite the 1% decrease in demand since January, 2008 and the increased supplies of oil, what explains the recent and continued rise in gasoline prices today?

?Blame the falling dollar, which has made dollar-denominated oil contracts irresistible to foreign investors and to any investors looking for a safe haven for their money during a turbulent time in the stock market.? ?Investors desperate for havens in a deep housing market slump are buying up all kinds of commodities, including oil. In addition, a weak dollar makes oil cheaper in foreign nations.?

4) If the Federal Reserve continues to enact expansionary monetary policy (i.e. ?the Fed continues to cut rates?), what impact will this have on the value of the dollar relative to foreign currencies? How will that impact futures contracts for crude oil and gasoline? And how would this impact gasoline prices?

Expansionary monetary policy may lead to higher price levels (inflation) for everything we buy with dollars . . . including other currencies. In other words, it will take more dollars to buy those foreign currencies. The dollar will depreciate relative to foreign currencies. That could continue to spur demand by foreign investors for oil and gas futures (which are traded in dollars), and that increase in demand for futures could ultimately lead to even higher prices for gasoline.

5) Markets are dynamic. There is constant pressure on supply and demand from all directions. Identify some variables referred to in these articles that could increase the demand for gasoline? Decrease? (Optional: Use a graph to illustrate each of these changes in demand on the equilibrium price and quantity of gasoline.)

Increase -Summer driving season -Increase in oil consumption in China and Middle East

Decrease Slower economy ?Americans? cutting back on their gasoline habit?

6) Identify some variables referred to in these articles that could increase the supply of gasoline? Decrease? (Optional: Use a graph to illustrate each of these changes in supply on the equilibrium price and quantity of gasoline.)

Increase ??ability of oil producers to increase their output? (i.e. improved technology, discovery of new resources)

Decrease -increase in price of crude (an input for gas) -hurricane, war, or other supply disruption

7) If the supply of gasoline increases at the same time demand increases, can you say for sure what will happen to the equilibrium price and quantity? (Optional: Use a graph to illustrate your answer.)

When supply and demand increase at the same time, more will be exchanged (equilibrium quantity will increase). Equilibrium price, however, may increase, decrease, or stay the same, depending on the relative size of each shift. For example, if the increase in demand is greater than the increase in supply, price will rise. If the increase in supply is greater than the increase in demand, price will fall.

Optional Extension Activities

a.. Provide students more experience with real and nominal values. In general, prices are higher today than in years past because of inflation, but when we adjust for inflation, the real prices for many goods today are actually lower than in years past. Real prices are adjusted for inflation. Nominal prices are not; they are the prices that appear on price tags. Nominal gas prices are at an all-time high, but until recently, today?s prices were lower than those of the 1980s when they were adjusted for inflation. Search the web to find prices of other goods in the 1980s. Then find an inflation calculator on the internet and calculate the ?real price? - what those goods would cost in today?s dollars. Are real prices for those goods higher or lower than today? Inflation Calculators:

In The 80?s:

a.. Have students visit the NYMEX.com website and read about ?How the Exchange Works.? Divide the class into 2 or 3 large groups and have each group create a short skit to illustrate how commodities exchanges work.

b.. Have students visit NYMEX.com to check on the current prices for gasoline and crude oil futures. Ask them to describe the overall trend in the price of the futures contracts over the past month. Then ask them to predict what they think will happen to the prices over the next month.

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And you conveniently left out how much these oil companies pay in taxes in relation to other companies and how much money these are REQUIRED to invest in developing alternative sources of energy--(blame the Dems for leaving that out -- as usual)

Also, you conveniently omitted how these companies cannot drill the massive oil deposits in Alaska, North Dakota, and many places off-shore. Maybe there's not enough oil to last the rest of our lives there, but there is enough oil to affect supply and demand -- much of the money would go to the U.S., the oil companies would pay greater taxes, and new jobs would be created for the United States populace. And when's the last time you saw a new refinery built? It's almost impossible, given the environmental regulations.

If the Democrats win the next election, they are going to have to address these questions. Do you think we will develop cars running 100 miles a gallon (or even 50 miles a gallon -- I know --we have those now) and if we do will everyone immediately junk their present car to buy one of these, or maybe we're not all independently wealthy.

Regarding taxes, I live in Colorado, and the State has said many of our bridges are badly in need of repair, and are talking about raising our vehicle registration fees by $50 (think that's the amount).

Just thought I'd add my 2 cents worth. (Ready to be flamed -- got my asbestos suit on).

But what they pay is irrelevant. Everyone business and individual should pay their required taxes. I have a business, I pay lots of taxes on it. Oil companies currently enjoy special EXEMPTIONS to "encourage" them to explore for oil. How wrong that is requires no explanation. it'd be funny if it wasn't OUR money filling the gaps so that they don't have to pay taxes.

Totally irrelevant to their massive profits and reduced taxes - the issue I posted on.

First, you're playing into the industry ploy that they'd pump enough oil to lower the prices. With a commodity that's not only limited in terms of current supply, but in terms of longevity, that's just plain BS.

Check into the industry practices a little. Just a couple years ago, natural gas (heating) prices were out of control. At the same time, the oil companies pumping oil out of the South were burning off natural gas at the refineries. Why? Berceuse they have a limited equation - they can produce natural gas, or gasoline, etc, but they have a finite capacity to produce one or the other from specific wells. They made more money by selling less natural gas at higher prices (rather than pumping more to sell at lower prices due to increased supply) and spend their capacity pumping other products (oil and gasoline,etc) that they could then sell more of.

Bottom line, the oil companies are not your friend or mine, they will gouge and steal every last dollar they can. They have no interest in helping Americans - just themselves.

I'm no fan of the DUmbocrats. However, we do need leadership that is not a psuedo-facist (the pure definition) state where government and industry collude to screw the populace.

In addition, there is currently little in the way of serious government effort to develop alternative plans to oil. The piddling dollars they claim go into research are a drop in the bucket compared to the tax breaks the oil companies still enjoy at our expense. Fair is fair - oil companies should pay equal taxes to all other industries.

It sounds like a local problem is going to be repaired with properly targeted local money. You drive, you pay to fix bridges. Sounds fair to me. The issue in most states is to make sure the money doesn't get diverted to unrelated causes.

Don't get me wrong - I'm not promoting either party. I'm promoting fairness to the people who supposedly run this country (us). Politicians and Administrations that run the government for the benefit of huge conglomerates are not working in the interest of the people.

The neo-cons running the Republican Party right now are offensive to the principles this country was founded on. Knock on my door when the real conservatives come back.

Excuse me???

All these points are relevant.

And...so if you get rid of the tax subsidies to big oil companies, and the price for gasoline goes up, what are you going to do about it? Increase the taxes? And if the price goes up more?

If your original post said "I feel the tax subsidies to oil companies need to be discontinued because ... and it will cause ... to happen", I probably would have not replied. But when you parroted many Democrats' position, blaming "GWB" and "big oil", I realized you weren't really looking for a solution, but just wanted to stir up anger against Republicans. And you didn't think anyone would call you on this.

If you want to blame someone, I'm sure there's more than enough blame to go around on both sides of the aisle. And how does anger and blame help solve the problem? Yes, it's easy to get others on the anger-and-blame bandwagon; everyone's upset about the price of gas, including me. The real problem is that our country needs to work together to develop and implement workable solutions for this problem. We need to put every possible solution on the table and look at it objectively, and pick what works and what works best.

In regards to "big oil", two things we could do is nationalize the oil industry (along with the health-care system). Or we could sell off our oil industry to foreigners and get out of the oil business entirely (and see what that would do to gas prices).

I wish we could have had someone from "Big Oil" join this discussion to hear his side of the story. "Big Oil" needs to be part of this discussion too.

By the way, I think if we could tap into most of our undeveloped oil reserves, we could make quite a dent in our needs for energy -- not forever, but for quite a while. And I am not connected with the oil industry--I work for the U.S. Geological Survey. We are not permitted to own oil stock.

No, they aren't.

Once again, irrelevant. We're not discussing the cost of oil. We're discussing tax fairness. The current law gives a tax discount to oil companies. Companies making $126B per year don't deserve a special tax incentive. End of story. Retail prices are another matter.

I don't care for Republicans or Democrats in general -at least not the party mainstream. I do call a spade a spade. The current administration and their neo-con allies have fought to preserve significant discounts to oil companies. In addition, they have consistently fought to divert tax dollars at an unprecedented rate to private companies that they favor.

That's not democracy, it's not capitalism, it's fascism. It's repugnant to democracy. It's revolting to all true conservatives, liberals, and patriots alike.

Again, the aisle has nothing to do with it.

I haven't seen anyone floating a proposal to nationalize oil. I do see tax unfairness.

I've spoken to people working the wells, inside research labs at big oil, industry consultants, and players at the wholesale/retail level. None of them defend the tax breaks except for small drillers who may actually deserve a break. Only upper management defends them as legitimate along with their neo-con allies.

If you know anything about oil, then you know that it will be 10 years before there oil from any new Arctic Drilling could be brought in, environmental considerations not withstanding. That will have no effect on the current situation.

It will also not affect the core issue I've mentioned multiple times: tax fairness.