PDF _ RL34625 - Gasoline and Oil Prices
31-Oct-2008; Robert Pirog; 18 p.

Update: Previous Editions:
August 20, 2008

Abstract: American gasoline consumers faced rapidly escalating prices during the first half of 2008, though prices began to decline in August. As prices increased to over $4.00 per gallon, consumers faced difficult choices concerning how to allocate limited budgets as the economy slowed. The price increases also adversely affected major industries, including automobile production, transportation, and agriculture. The high gasoline prices also were thought to contribute to the slow-down in economic growth and the potential for general price inflation. The oil industry earned record corporate profits while other sectors of the economy were negatively affected.

Gasoline prices did not increase on their own over this period. The rising price of gasoline was driven by the increasing price of crude oil, the major cost component of gasoline. Crude oil prices, which peaked at just under $150 per barrel in July, and then turned down, rose more quickly than gasoline prices, and the cost share of crude oil per gallon of gasoline rose, putting cost pressure on the refining, distribution, and marketing sectors of the gasoline supply chain.

While the recent increases in the price of crude oil began in late 2007, the price of oil has been increasing, at different rates, since 2004. Many factors have contributed to the price increases over this period. Over the past five years, the mix of factors affecting price at any particular time has varied.

Recently, several factors, including the continuing increase in world oil demand, the effect of speculation on energy futures markets, the transformation of the energy futures market into a pure financial market rather than a commodity market, the declining value of the dollar, foreign governments’ fuel subsidization, and limits to the ability of the market to increase supply have been identified as key in explaining oil, and therefore, gasoline price increases.

Policy debates have focused on curbing speculation on oil futures markets by increasing regulatory presence. Over three dozen pieces of legislation have been introduced in the 110th Congress to address speculation-related issues. Other possible policy directions have included declaring a moratorium on collection of the federal excise tax on gasoline, conservation, and the use of oil in the Strategic Petroleum Reserve to augment U.S. supplies of crude oil. Additionally, the possibility of drilling in currently excluded areas on the Atlantic and Pacific outer continental shelf, as well as the Gulf of Mexico, have been considered. The potential opening of the Alaska National Wildlife Refuge for oil exploration and development has also been debated.

The oil market has demonstrated a tendency to be cyclic and sharply volatile. Policy measures that assume long-term stability in the market are unlikely to attain the multiplicity of goals for oil policy the American public desires.

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Topics: Energy, Economics & Trade

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