Here’s a new gas shortage story for you. My local gas station ran out of the number “2.” You know the big signs announcing the prices of each grade of gas? Honest-to-gosh, this station had all the plastic “1s” they needed and all the “9s,” but had to improvise to post enough “2s”.
You guessed it. The “2s” came right after the dollar sign. I guess even the station owner wasn’t prepared for gas prices to shoot past $2.
Once we’re past the sticker shock, can we untangle what’s going on? And, to be blunt, are Washington drivers getting screwed?
First, once you adjust for inflation, current gasoline prices are not at historical highs. In the early 1980s gasoline hit nearly $3 a gallon in today’s money. What was going on at the time? The Saudis had raised crude oil prices and there was heavy fighting between Iraq and Iran.
Gasoline prices were also at today’s high level from September through December 1990. What was going on at the time? The Iraqi occupation of Kuwait.
The No. 1 determinant of Washington gasoline prices is the cost of crude oil. The cost of crude oil is set by a group of men sitting around a conference table – the OPEC oil ministers. Market demand imposes mild limits on OPEC pricing decisions. In order to raise prices, OPEC has to cut production. When world demand is low, the oil ministers would have to cut production a lot in order to raise prices, and consequently would sell relatively little oil. Conversely, when the world economy picks up, oil demand rises and OPEC can raise prices more easily.
Nonetheless, within very broad limits OPEC sets the world price of crude oil and this drives the price of American gasoline.
That’s not the end of the story, though. Gasoline prices don’t simply mimic the price of crude. In the early 1980s, refiners bought a dollar’s worth of crude oil, turned it into gasoline and sold the gasoline for between $1.50 and $2. In recent years, that dollar’s worth of oil has sold for much higher prices as gasoline, being marked up into the $2 to $2.50 range.
That extra markup goes to the gasoline companies rather than the producers of crude oil.
Washington drivers typically pay more for gasoline than consumers in other parts of the country. The gap varies, but 10 to 20 cents a gallon isn’t unusual. (If it’s any consolation, prices in California can be another 10 to 20 cents higher than prices here.)
Washington state gasoline taxes, 28 cents a gallon, are a little higher than in most of the rest of the country. Our taxes used to be about 3 cents a gallon higher than the average elsewhere. The gas tax went up last July and now we’re about 8 cents higher. Taxes do add to the cost of a gallon, but an extra 8 cents doesn’t explain two-dollar gas.
Are the gasoline companies ripping us off? Attorney General Christine Gregoire’s office has been investigating recent price increases and comes down on the side of market factors rather than an illegal conspiracy. So I doubt that the gas companies are behaving illegally.
The real issue is that almost all gasoline sold in Washington comes from one of four refineries. With so few “competitors,” it’s not tough to act like a local cartel without crossing legal boundaries.
You don’t undercut the other guy’s prices. You don’t push hard to add to refinery capacity. What we see here in Washington is part of a national trend toward concentrating refinery ownership in fewer and fewer hands. All completely legal – and all contributing to keeping prices high.
There’s nothing on the horizon that’s likely to increase competitiveness in our local markets. OPEC behavior is hard to predict. Eventually the price of crude will drop, but there’s no reason to think it will drop soon.
The forecast for the near future? Unfortunately, small further increases seem likely.
Remember the number “2” shortage? If you should happened to see a gas station owner shopping for the number “3,” we’re all in a lot of trouble.
Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu.
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