Yesterday, the price of a gallon of gas in Madison jumped up to $2.79 a gallon. I have every expectation of seeing it go higher over the next several weeks and months. Why is it so expensive? Well, there are several factors at play.
First of all, the demand for gasoline is starting to increase. The weather is getting warmer and people want to travel more: to the park, to the grocery store for cookout supplies, to State Parks for get-togethers, to the Wisconsin Dells, etc. Simple supply and demand: as the quantity demanded increases, the price will tend to increase as well.
Secondly, the supply of gasoline may be decreasing. Many cities and regions regulate the type of gasoline that can be sold and used. They require one blend of gasoline for winter driving and another blend of gasoline for summer driving. As the refineries switch from winter production to summer production, supplies of gasoline will drop. It will take time for the refineries to fully gear up for the summer blend of gasoline. Until that happens, supplies of the summer blend will be limited. As the quantity supplied decreases, the price will tend to increase.
Thirdly, taxes. Every person in the U.S. pays 18.4 cents a gallon in Federal gas taxes. We Wisconsin residents are privileged to pay another 31.1 cents a gallon in state gas taxes. I pay a total of 49.5 cents a gallon in taxes. That means that 17.7% of the price of gas is tax related.
Fourthly, gasoline additives. Federal regulators are concerned with reducing the amount of pollution produced by gasoline. To accomplish this, they require that oil refineries put pollution reducing chemicals into the gasoline. MTBE used to be the preferred additive. However, in March of this year, federal regulators started requiring all oil companies to use ethanol instead. This is, or will be, a problem. Midwest ethanol producers were already struggling to keep up with the demand for ethanol before it was mandated as an additive for all gasoline sold in the United States. The demand for ethanol is now far, far greater than it had been. In additional, ethanol is more expensive to transport and to store than MTBE was. To put it bluntly, this "simple regulatory change" could add another 30 cents to the price of a gallon of gasoline.
Finally, balkanized gasoline markets. For most products, supplies can move freely from one region of the country to another. If there is a shortage of (for instance) wood in New Orleans, New Orleans businesses can buy more wood from other areas of the country. If there is a shortage of steel in Manhattan, construction firms can buy more steel from Indiana. The gasoline market doesn't work this way, unfortunately. Many cities and states mandate unique blends of gasoline. California has a very strict set of requirements. Milwaukee has another set. Buffalo has a third set and New York City has yet another. Most of the Midwest requires different gasoline than most of the East Coast.
All of these requirements are mutually exclusive. Milwaukee drivers can't use Buffalo gas and California drivers can't use gas from New York City. If New York City faces a gasoline shortage, there is no one to buy extra supplies from. Thus, the price of gasoline will sharply increase in New York City -- but nowhere else. If New York City drivers were free to use gasoline from other regions, then New York City gas station owners could simply import more gasoline from Upstate New York, New Jersey, or other surrounding regions. Sadly for NYC drivers, it is illegal to do so and they simply have to suffer with higher gas prices.
These five factors: increasing demand, (temporary) decreasing supply, taxes, federally mandated gasoline additives, and balkanized markets have a large influence on the price of a gallon of gasoline. Of those five factors, three are government created. Sad to say, your government has a larger influence on the price of gasoline than the oil companies do. As a matter of fact, over the years, the Federal government alone has "earned" more money from gasoline than the oil companies have.
As you drive this summer and watch the steady climb of gasoline prices, remember who to blame. Your state and federal representatives will tell you that greedy oil executives are ripping you off. What your representatives won't tell you is that their own greed will have more influence on the price of gasoline than that of the oil executives. What your representatives won't tell you is that their rules and regulations concerning what gasoline you can put into your car will affect the price of gasoline far more than the greed of oil executives. They won't tell you, so you will have to remember -- and hold them accountable for their actions.