What's to Blame for the Summer Gas Price Spike?

Gas prices have been high due to global uncertainty about the state of the U.S. economy, but they should go down as the dollar stabilizes.

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Bruce Yandle is the dean emeritus of the College of Business & Behavioral Science at Clemson University and a distinguished adjunct professor of economics at Mercatus Center at George Mason University.

Americans paid higher prices at the pump over the last few days than during any previous Labor Day weekend. According to AAA, the average price of a gallon of regular self-serve gasoline hit $3.83 at the end of August, having risen for 49 of the previous 52 days. In January the average price was $3.29. That's 54 cents less than August's price. And remember that this is just the average price, not necessarily what real people pay in real places. 

Why such high prices? Are we back on the rising rails of the Great American Gasoline Scream Machine? Will we be battered by higher priced gasoline for months on end? I don't think so, but there are several key parts of the price puzzle to consider. Let's look at a few of them.

There's more going on here than just the raw forces of supply and demand. In August, drivers in Hawaii, California, Washington, and Oregon were shelling out more than $4.00 for a gallon of gas. But it wasn't always the same gas. As a result of EPA rules for improving regional air quality, there are some 17 different blends of gasoline sold across the country. When hurricanes and fires hit one of the specialized refineries or disrupt shipments, gasoline from elsewhere won't get the job done. 

[See a collection of political cartoons on gas prices.]

Second, since gasoline starts with crude oil, and a large amount of crude comes from other countries, there's a dollar problem to think about. When the dollar is strong against other currencies, prices at the pump expressed in dollars go down. And when the dollar is weak, we pay more. 

Since oil traders like to think in terms of gold, let's look at what has happened to the price of oil as they do. In January 2012, an ounce of gold bought 15.9 barrels of oil. In August 2012, that same ounce of gold bought 17.9 barrels. Hooray! The price of oil has fallen 12.5 percent when measured in gold. But sadly, the price of oil and gasoline has still risen when measured in dollars. So instead of oil going up in value, the dollar has gone down.

Why so? World currency traders don't think as highly of the dollar these days. There's uncertainty about U.S. debt, fiscal policy, and inflation. The dollar is riskier, and fewer people are rushing to buy it. So it wasn't big oil companies, Arab traders, or Canadian oil producers who nudged prices higher—it was our own fiscal and monetary policy. But it's a lot more fun and gets a lot more votes when politicians blame someone else.

[See a collection of political cartoons on Congress.]

There's more to the story of course. Gasoline would be cheaper if the United States was more generous in producing oil on federal lands and offshore. The Obama administration has expanded drilling on some federal lands, but slowed the approval process for drilling in the Gulf and stopped Atlantic coast off-shore explorations. The administration also frowned on allowing Canadian oil to flow to the lower 48 states by way of the Keystone pipeline. 

If we unlocked our known reserves, the United States would become one of the world's largest oil producers. Gasoline prices would head south. Instead of unlocking our supply of gasoline, Washington politicians responding to environmental concerns have cut it back.

On the positive side, there is a vast new supply of natural gas, which is a substitute for oil and gasoline in some applications. Expanded natural gas production puts downward pressure on gasoline prices. We've also stopped bombing oil-producing countries, and that always seems to improve the supply and price of crude oil.

[Take the U.S. News Poll: Should Obama Make His Keystone XL Decision After the Election?]

When we put all this in the pot and stir it, what sort of price forecast might we see floating to the top? Higher gasoline prices for the rest of this year? Lower? About the same? 

I think we will see slightly lower prices. Say $3.30 on average instead of $3.70. Hurricane season will have passed, the economy will still be slow, the dollar seems to be stabilizing, and our wars in the Middle East will have ended—at least for now—and we will not likely see new government restrictions on the flow of energy. In addition, natural gas will be flowing at a higher rate.

Fill 'er up!

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