Economics Professor Explains High Gas Prices

TERRE HAUTE, Ind. (WTHI) – If you haven’t filled up by now, it may be too late for you.  Gas prices were predicted to go up just in time for the Memorial Day holiday.

Memorial Day weekend is not exactly a good time to see gas prices go on the rise, but they always do.  Adam Hartman owns the Fort Harrison Mini-Mart and he tells us when he pays more, so does the consumer.

“I believe that part of our problem is it’s gone to a publicly-traded system,” said Hartman.

Rose-Hulman economics professor Dale Bremmer says the Great Recession opened the eyes of major-city investors about the high risk of putting money in real estate and bonds.  Sharks on Wall Street have turned to making safer investments.  They’re buying futures in oil and gasoline, which drives up the price we pay.

“When they expect the future price of gasoline to go up, people buy these futures and it will drive the current price of gasoline up,” said Bremmer.

Futures in gasoline are very similar to corn or soybean futures.  Those are meant to protect farmers from things like bad weather.  The problem with having futures in gasoline is that more of us buy gas.  Increased demand means higher prices.

The irony with high gas prices is that U.S. oil production is at an all-time high.  So why the high gas prices?  Oil-rich places in the world are unstable, places like Nigeria, Libya, Russia, and of course, the Middle East.

“The oil prices could be higher and gas prices could be higher if it wasn’t for the U.S. production,” said Bremmer.

So when will we see some relief?  Bremmer says U.S. gas consumption is coming down, and more fuel-efficient standards are being adopted.  Still, our country has some major decisions to make in the not too distant future.

“What are we going to do in terms of energy, and are we going to be so dependent on a foreign price that we can’t control?” Bremmer asks.

When computing the cost of a gallon of gasoline, crude oil makes up about 70% of that price.  Other factors include refining costs, transportation, and taxes.  Bremmer agrees that gas stations carry a small profit margin on gas, which is usually just a few cents per gallon.

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