What drives up gas prices?

June 10, 2008 12:32:51 AM PDT
The rest of the country is now feeling California's pain with the national average for a gallon of gas hitting $4 a gallon for the first time. The Bay Area has been there for a while, but the reasons why are somewhat unclear. Some say it's speculation over the cost of a barrel of oil and others say it's a question of supply and demand.

On Saturday in San Francisco gas was $4.35 and 48 hours later, it jumped up 10 cents. People want to know what's behind these random jumps in gas prices.

Filling up the tank means hard choices for people in the Bay Area.

"My God, I don't know. I'll start walking now," said Honey Wells, an Orinda resident.

"I was thinking of taking my car to college next year, but I'm not going to anymore," said Nora McIntosh, from Orinda.

Record high oil prices are putting a wrench in the machine that is the American economy.

"I think it's unwelcome and it's a real burden on American consumers," said Henry Paulson, the Treasury Secretary.

On Monday, Saudi Arabia said it will call a meeting of oil producing countries to discuss the soaring prices.

But what is behind the surge?

"It's supply and demand," says Severin Borenstein. Director of the University of California Energy Institute.

Borenstein says if you're wondering why you're paying more at the pump, just look overseas.

"Most of the real push in demand is coming from other parts of the world, particularly the developing world, like China and India and elsewhere," says Borenstein.

Supply and demand is a common answer, but some are pointing the finger at speculators. They are investors who try to make money by predicting market moves and buy commodities, like oil on paper. The barrels of oil never trade hands.

For example, the investor will enter into a contract with an oil supplier for 1,000 barrels of oil for the current market price. Let's put that at $130 a barrel, for a December delivery. The investor acts as sort of an insurance company. The supplier is guaranteed to get the $130 dollars a barrel and if the price goes up, the investor will reap the profits.

So in December, if a barrel of oil is going for $150, the investor makes a profit of $20,000. Of course, it can work the other way too. The price could drop, and the investor would lose money.

Some feel speculators can change supply and demand forces and artificially push prices higher. Regardless many, including Treasury Secretary Paulson, don't believe that's the case.

"This is supply-demand. Financial investors are on both sides of the market, long and short. They don't set trends. They follow the trends," says Treasury Secretary Paulson.

There are two ways to impact the supply and demand product like oil. One is to increase the supply. Oil companies and President Bush have come out in favor for drilling in many places across the United States including Anwar. Another is to reduce demand. That includes hybrids and electric vehicles and public transportation. If one or both go into effect, it will still take a while to see results at the pumps.


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