Why are gas prices so high? Some Q&A from USATODAY.com

[w¡n9Nµ7 §£@¥€r 123]

Q: Don't gas prices usually rise this time of year?

A: Yes, because of reformulation. Automakers add chemicals to meet summer clean-air regulations. Typically, that results in minor production problems and higher gas prices.

Unfortunately, one favored additive, MTBE, has also been linked to health problems. Many states have banned the chemical, and the federal government has not limited liability from MTBE lawsuits. So many refiners are substituting ethanol for MTBE. But there are concerns that ethanol producers won't be able to get it to all refiners in time, causing a bigger-than-usual production hiccup.

That's not all. More than seven months after Hurricanes Katrina and Rita destroyed more than 100 oil platforms in the Gulf of Mexico and damaged major refineries along the Gulf Coast, refining capacity remains down.

The third-largest refinery in the USA, the British Petroleum refinery in Texas City, Texas, just started up again in early April after being shut after the hurricanes and after a fire that killed 15 people a year ago.

Gasoline production is still off by about 700,000 barrels a day, says Tom Kloza, chief oil analyst for Oil Price Information Service in Wall, N.J. But much of that will be coming back online soon, he says.

"The next 30 days are going to be hairy," Kloza says. "But there's a lot of capacity coming back on in May."

Q: What else is pushing up gas prices?

A: Oil prices accounted for 59% of the price of a gallon of gas at the pumps, according to the Energy Information Administration. That's up from 47% in 2004.

The price of a barrel of light sweet crude oil has soared from $53.71 a barrel a year ago to $68.98 Tuesday. Prices are rising because of increased world demand - especially from China and the USA.

Production hasn't kept up. Currently, the world produces about 86 million barrels of oil a day. Sounds like a lot, but it's not, because the world consumes about 85 million barrels a day. "For all intents and purposes, supply and demand are balanced out," says Charles Swanson, industry practice leader at Ernst & Young's Houston-based energy center.

Because supply and demand are so tightly matched, commodity traders worry that any increase in geopolitical risk could reduce supply and send prices soaring. Right now, some of the biggest producers - Iran, Nigeria and Venezuela - are wrapped in risk. Fears of a shortfall in supply add about $20 a barrel to the price of oil, says Mark Zandi, chief economist for Moody's Economy.com. Commodity traders worry, too, that the next hurricane season begins June 1, and that another large hurricane could hurt U.S. refining capacity again.

Q: Why does my cousin in Indiana pay so much less for gas than I do in California?

A: Taxes, mainly. Total taxes add an average of 45.9 cents to the cost of a gallon of gasoline. But it's higher in some states. Indiana taxes gas at 48 cents a gallon; California, at 60 cents, according to the Tax Foundation. New York has the highest gasoline taxes at 62.9 cents a gallon. Federal taxes add 18.4 cents to the cost of gas.

And a lot of municipalities have gas taxes, too. Gas taxes are cheapest in Alaska, where they total 26.4 cents. When gas prices were low, it was easy for governments to raise gas taxes. Now they're more reluctant to do so.

Q: Are oil companies gouging consumers?

A: To a large extent, they are simply passing on increases in the price of crude. On the other hand, they're not starving, either. ExxonMobil recorded a $36.1 billion profit for 2005, largest annual profit in history.

Oil companies argue that current profits go to fund further exploration. And, says Kloza, speculators have to take part of the blame by pushing up oil prices in commodity markets, where oil is bought and sold.

Q: If people drive less, will prices fall?

A: Yes. U.S. motorists consume about 10% of the world's petroleum production. But don't hold your breath. So far, the consumer response to higher gas prices has been "incredibly muted," Zandi says. He thinks it would take prices above $3 a gallon for an extended time for consumption to drop.

Will the fuel-price increases finally flood showrooms with really cool, fuel-sipping vehicles? Nope. A few additional gasoline-electric hybrids will be introduced soon, but those were planned anyway.

Also, it takes time to shift production to smaller engines - four-cylinders instead of V-6s, for instance.

Automakers don't want to overreact. Even when the average price passed $3 a gallon after Hurricane Katrina in September, automakers say they only saw a small shift by buyers to more fuel-efficient engines and vehicles.

Most experts don't think gas prices will remain this high for long. The government is predicting that prices will fall again later in the summer.

"The only way you're going to pay $4 a gallon for gas is by returning a rental car without filling it up," Kloza says.

[rebeccajo 14]

Who is USA today spinning this ####### for?

[almaty 19]

the reason..you can never be to thin ( yes you can) or as exxon says too rich

[Jasman0717 9]

[Mr. Big Dog 10,747]

What a load of #######. We're being ripped off by the oil companies. That is why gas prices are so high. Let's see: We are paying record high gas prices while the oil companies (all of them) make record high profits. And I am to believe that one has nothing to do with the other.

Edited April 15, 2006 by ET-US2004

[almaty 19]

maybe exxon is saving up to pay off the state of alaska..over valdez..they lost a lawsuit..going to the supreme court..they have to pay 1 year total profits to the state...

[gimygirl 0]

Who is USA today spinning this ####### for?

[gwenneh 7]

I thought that too. Then I moved to England, where petrol is roughly two to three times the price it is in the US.

I've quit bitching, and started taking the train.

[Hilarious Clinton 452]

Ummm Oil is a finite resource so the price will rise as does it's scarcity. When will people realize this?

[rebeccajo 14]

I thought that too. Then I moved to England, where petrol is roughly two to three times the price it is in the US.

I've quit bitching, and started taking the train.

Gwen, you're absolutely right. Petrol is above $6 a gallon over there.

The question I have is this - if you drove everyday, would you have to go as far as an American would (typically) over here? And would your vehicle get better MPG than an American car? How often would you have to fill up?

I contend (maybe incorrectly) that we drive MUCH further each day than over there - that our consumption is far higher than for the typical european driver. Am I wrong?

[gwenneh 7]

If I drove everyday, my commute would be almost identical to the commute that I had in the US. We drive as much here in the UK as we did when we lived in the States. Our car does get about 10 MPG more than our car in the US did, but we have to fill just as often given the amount of time spent sitting in traffic in The UK's Largest Car Park (the M25) and that sort of thing. It was killing us, so we take the train instead.

I do think you are right in saying that the consumption of fuel in the US is more than the average European (UK) driver, with less efficient cars and longer distances. It does roughly even out, as my husband has calculated.

[Hilarious Clinton 452]

Public transport in the UK (and the rest of Europe) is much better than most of the US.

[Mr. Big Dog 10,747]

Ummm Oil is a finite resource so the price will rise as does it's scarcity. When will people realize this?

True. But would you concede that there's some correlation between the record profits that the oil companies have made lately and the high prices that we're being charged at the pump?

[iceyspots 0]

Detroit is suffering... especially since our transportation system (Or lack thereof) is a joke... Busses are old and unreliable... and there's nothing other than that.

[Hilarious Clinton 452]

Ummm Oil is a finite resource so the price will rise as does it's scarcity. When will people realize this?

True. But would you concede that there's some correlation between the record profits that the oil companies have made lately and the high prices that we're being charged at the pump?

Yes. I would. Plus global politics etc etc...