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Gas Prices Rising

An Overview of High Gas Prices and Their Cause

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Oil Well

An oil well extracts oil from the earth.

Getty Images North America
Updated June 11, 2008
Gasoline prices in the United States have climbed steeply over the past few years. Gas was near $1 a gallon a decade ago. It took six years for the price to double to $2 a gallon in 2004. Four years later, in June 2008, gas prices have doubled once again to over $4 a gallon.

The dramatic increase in the price of oil has been the most significant factor relating to the increase in the price of gasoline. The high price of oil is a simple case of supply and demand. The supply of oil has not increased in proportion with the increase in demand. Demand for oil has increased worldwide as countries like China and India, as well as other developing countries, are dramatically increasing their demand for oil. This demand, coupled with investors who are seeking to invest in commodities such as oil due to the weak dollar, are driving oil prices up.

Oil prices are directly related to gasoline prices – for every one dollar increase in the price of a barrel of oil (42 gallons of oil), gasoline prices rise 2.5 cents per gallon at the pump. Thus, a $10 increase results in abut a 25 cent increase for a gallon of gas.

The United States, home to less than five percent of the world's population, currently uses about one quarter of the world’s oil. China and India are catching up in oil usage as the number of automobiles skyrocket in those countries.

The cost of gasoline is not solely based on the price of oil. The price of gasoline also includes the taxes, the cost to refine oil into gasoline, the transportation costs, and the profit of the gasoline dealer. However, these factors add up less than half of the cost of gasoline in the United States.

The ongoing increase in gasoline prices have impacted not only the U.S. economy but also the world at large as the price of oil and gasoline impacts transportation (by truck, airplane, and boat), tourism (a major world industry), and is starting to have a major impact on the manufacturing of automobiles. For example, it was recently announced that the Ford F-150 pickup truck, which was the best selling automobile since 1991, dropped to the fifth most popular vehicle in May 2008.

The price of oil in the long term is not likely to decrease and thus the price of gasoline will increase as well. Some analysts anticipate the price of gasoline to reach $6 to $7 per gallon at the pump as soon as 2010.

OPEC, the Organization of Petroleum Exporting Countries, which is responsible for just over a third of the world's oil production, does not plan to make any effort to curb oil price increases.

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