Mario Tama/Getty Images It's true. America produces more oil than it consumes. That's one of the reasons the U.S. is described as "energy independent." On the surface, then, it doesn't seem to make sense that gas has gotten so expensive. That energy independence, though, is not true independence. On the contrary, much of the oil that the U.S. uses is from foreign sources. According to American Fuel & Petrochemical Manufacturers, 40% of oil that reaches U.S. refineries is from other countries. That fact demonstrates that the U.S. is not in charge of oil or gas prices. Instead, the oil market is quite interconnected across different countries, and one ripple anywhere in the world oil market causes a tidal wave across the globe. That means war in the Middle East has a similar effect on the price of a barrel of oil from Oklahoma as it does on oil from Tehran. And then there's the fact that oil is traded on the market as a global commodity, with prices fluctuating up and down like stock values. Finally, the economic law of supply and demand comes into play. Crises, like the current war in the Middle East, cause a run on the market, creating a rise in demand. That, in turn, causes a rise in oil prices, which raises the price of gasoline. And that massive hike in gas prices takes a long time to fall back down. Why the U.S. imports so much oil Dmitri Toms/Getty Images Many American refineries are not set up to process the kinds of oil that come out of American oil fields. Domestic oil is "light" crude, but many U.S. refineries are designed to process heavy crude imported from other countries, since foreign oil met most of America's energy needs in the past. Retrofitting existing refineries to process lighter crude would cost billions of dollars. Another factor is that sometimes it's just cheaper to use oil from other countries. There's the cost of transportation, for example. The U.S. is vast, and it can be cheaper in some regions to transport oil from Canada or Mexico than from across the country. That's one reason why gas prices differ across the U.S. Then there's the fact that some other countries can just extract oil more cheaply, especially when you consider the costs of land leasing and labor. It's important to note that the price of oil is actually set by global traders as they bid on crude oil. Bids go higher as traders see an opportunity to profit from a crisis. That higher cost is passed down to the consumer. And because oil is so interconnected globally, when supply is restricted anywhere, it affects everybody. The fact that around 20% of the world's oil travels through the Strait of Hormuz has a huge impact on prices. We're kind of doing it to ourselves, too Gary Hershorn/Getty Images There is an economic principle called "Rockets and Feathers." In the context of gas prices, it suggests that they shoot up quickly when they increase, but fall very slowly. No doubt, you've seen that firsthand. Why does it happen that way? In part, it has to do with supply and demand. When you heard that gas prices were about to shoot up because the U.S. was going to war with Iran, what did you do? If you rushed out and filled up before prices got too high, you helped to increase demand. And what happens when demand increases? Prices go up. This occurs even before the more expensive oil hits the refineries because gas stations preemptively base their prices on how much it will eventually cost to replace the gas they sell today. So, why do prices take so long to fall? Well, when prices are high, customers tend to search harder for bargains and to see who has the cheapest gas. Prices remain high, however, because demand is still high. Some economists believe that many drivers don't feel the need to put so much effort into bargain hunting when prices start to drop. Many gas stations, then, don't see the need to be that competitive in their pricing. Eventually, prices do fall, but it's a gradual process.
Liked by Ava Rogers, Logan Roy
Liked by Ava Rogers, Logan Roy
Liked by Ava Rogers, Logan Roy