Vol. II, No. 3: 1. AutoMotives: Gas Prices, How Low {or High} Will They Go?

There's a lot of talk these days about folks driving instead of flying over the holidays. Add to that the number of folks here in Vermont -- without an adequate public transportation system -- who drive to work, and those who make a living by driving here and there, and the question of the cost of gas is at least a curiosity for many. ...

It didn't seem that long ago when the news boasted of the lowest gas prices ever {adjusted for inflation, of course}. That was back in the mid-winter of '99. Then, in what seemed like the time it takes a Hum-V to go through 10 gallons, the price was skyrocketing. And now, gas prices have again started to fall. ... So what's the scoop? Will gas prices continue to drop? Will they head for the moon?

What's up {or down} with gas prices? ...
A little over a year ago, we ran a piece here entitled A Short History on Gas Prices. With charts and tables and graphs, we tried to offer a little insight into the fluctuation in gas pricing over the years. Then, we noted that, after the oil embargo back in '73, when gas prices jumped some 50% in pretty short order, the increase continued almost steadily through the Iran hostage crisis in '79-'80. Things leveled off or even fell slightly after that, but the Gulf War again sent prices on an upward spiral. But by 1992, the 'real' {i.e., the adjusted-for-inflation} price of gas began a fairly steady decline, right up through February 1999, when it reached a national average of less than $0.955/gallon. But by March of 2000, it was back up to $1.54/gallon -- a 60% increase in just 13 months.[1] And this time, gas made the news for some of the seemingly outrageous prices at the pumps across the country, especially in the mid-West, where rumors of price gouging were rampant as gas went above $2.00/gal. in some areas.

Now, once again, prices have fallen. According to the Energy Information Administration [EIA] of the Dept. of Energy, "the national average retail gasoline price has fallen nearly 48 cents from its peak on May 14." This, according to the EIA, "is already the widest one-year range in retail prices since EIA began its weekly survey in 1990." ["Why are gasoline prices falling so rapidly?" EIA/DOE, Nov. 2001.] As you can see from the chart below, both here in New England and across the nation, we're seeing the steepest plunge in gas prices in at least the last decade, and probably longer.

In some areas of the country, you can "fill 'er up regular" {yourself, of course} for well below $1.00/gal. again. According to the constantly up-dated data available from gaspricewatch.com -- a consumer watchdog and advocacy group -- a Speedway in Dayton, Ohio, was selling the cheapest unleaded regular in the country on November 30th ... at 81¢/gal. That put it some 27% below the national average for the date, which was $1.127, while diesel was going for $1.223/gal.

On the other side of the country, Gas Price Watch listed a station in Santa Ana, California, as the highest gas price at {ready?} $2.19/gal. But when we checked the individual listing, it turned out to be $1.19. We know we're paying more than that up here in Vermont. So how come that Santa Ana station came out on the high end? Apparently because Gas Price Watch only draws the high-low data from stations with the most up-to-date info, within the past 48-96 hours. For example, when we checked prices in the DownStreet neighborhood on the site {you can check by zip code within a given radius}, the lowest price we found was $1.39, but it was from mid-October. So we called around to check some current local prices. ...

Local prices ...
On November 30th, most stations in the DownStreet neighborhood were selling a gallon of unleaded regular for between $1.219 and $1.239. If we take the average of $1.229, that would mean we're paying about 10% above the national average. The lower prices were usually in larger population centers, like S. Burlington or Middlebury, while smaller towns usually had prices a couple of cents higher. Here in Bristol, for example, both Park Filling and Village Mobil were at $1.239, while Randy's Citgo in Middlebury was at $1.219, as was the mega-station of South Burlington, Spillane's.

What's driving prices? ...
There are a number of things that combine to drive gas prices up or down. The cost of a barrel of crude oil is the most obvious thing. But the cost of crude represents only a part of the final cost of gas at the pump. At $1.32/gal. -- the price at the pump in October 2001 -- the refining process accounted for about 10% of cost. Distribution channels and marketing, including the profits associated with them, accounted for another 21%. But taxes make up the rest.

As most people realize, a fair bit of the cost of a gallon of gas at the pump is taxes. There are actually at least two taxes associated with gas at the pump here in the U.S. ... 18.4¢/gal. goes to the nation-wide federal tax on gasoline, and additional amounts go to state and {sometimes} local taxes.

If you look on a state-by-state basis, the average state tax on gas was about 20¢ per gallon. Of the 50 states and D.C., Connecticut has the seemingly unenviable position of boasting the highest state tax at 36¢/gallon. Rhode Island was 2nd at 29¢, and Montana 3rd, at 27¢. Vermont fell in the middle of the pack at 20¢/gallon, along with the Dist. of Columbia, Iowa, Louisiana, Minnesota, North Dakota, South Dakota, Tennessee, and, believe it or not, Texas. That put them all at a fraction of a cent about the state averages. Georgia boasted the lowest tax on gas at 7.5¢/gallon, followed by Alaska [8¢] and Wyoming [9¢]. The oil refining capital of the East -- New Jersey -- came in 4th lowest with a state tax of 10.5¢/gal.

What's a good price? ...
Less than $1.00/gal. sounds good. But what if prices start to climb again? ...

If you get to thinking that the price of gas may become prohibitive, let us offer some of the following stats to put things in perspective: Across the border in Canada, at US$0.45/liter vs. $0.34 here in the U.S., gas is about 30% more expensive at the pump per liter. {FYI: The measure used by most of the rest of the developed world, a liter is slightly more than a quart [0.264 gal.]; therefore, $1.00/gal. = $1.056 for 4 liters.} Yet only 1¢ of that additional cost -- whether in U.S. or Canadian dollars -- is accounted for by anything other than the higher tax rate on gasoline in Canada. Put another way, in the U.S. 29% percent of the price of gas at the pump went to taxes, while in Canada, that figure was 45%. But, as you can see from the table below, gas in Canada is still cheap compared with most of Europe and Japan.

Cost per Liter Including/Excluding Tax for the U.S., Canada and Selected E.U. Countries
Country	Price $US/liter	Tax Excluded	Price $CDN/liter	Tax Excluded	Tax % of Price
The U.K.	$1.20	$0.28	$1.79	$0.42	76%
France	$1.05	$0.30*	$1.56	$0.40	74%
Germany	$0.92	$0.25	$1.37	$0.37	73%
Italy	$1.03	$0.32	$1.53	$0.48	69%
Spain	$0.76	$0.28	$1.13	$0.42	63%
Japan	$0.98	$0.42	$1.46	$0.63	57%
Canada	$0.45	$0.25	$0.67	$0.37	45%
United States	$0.34	$0.24	$0.51	$0.36	29%
Source: Gas Price Watch. Nov. 30th, 2001 [http://www.gaspricewatch.com/GasTaxes.asp] * The data provided showed the tax excluded price in France at $US 0.03/liter, which, for obvious reasons, we took to be a transposition error.

In Japan, at $0.98/liter gas at the pump is about twice as expensive than it is in Canada, and 3 times more expensive than here in the U.S. Stripped of taxes, however, at $0.42, gas in Japan is still 75% again as much as here in the U.S., presumably because of increased shipping & transport costs.

On the other hand, the tax-excluded price in most European countries is comparable to the rate in the U.S. -- from $0.25/liter in Germany to $0.32 in Italy. But the actual price at the pump is considerably greater, because of the higher tax rate. The U.K. tax-excluded price, for example, is $0.28, about 17% higher than here in the U.S. But the actual price at the pump is $1.20/liter -- or about $3.92 per gallon, more than 3 1/2 times the cost here in the U.S.

Where will prices go from here? ...

Here in the U.S., for a variety of reasons, it's highly unlikely that gas prices will approach anything near those European prices. With the lowest tax rate in the developed world, the U.S. price of gas is likely to remain cheaper than anywhere save possibly the OPEC countries themselves. But there are other factors that can and will influence gas prices.

As a commodity, one thing is certain about the price of gas: Despite any talk of a New Economy or even newer economic theories, the law of supply and demand will have its way. Even now, OPEC is considering adjustments to the oil supply. Any cut-backs in production, then, will mean lower supplies and, therefore, higher prices ... just as the higher demand of the summer months means an increase in gas prices each summer. But the current world situation may also have an impact.

If history is any indication, the price at the pump will eventually go up in response to the War on Terrorism, just as it did during the Iranian hostage crisis in '79, the subsequent Iran-Iraq war, and the U.S. Gulf War. In fact, it may only be as a result of some pretty strong politicking in trying to put together a broad-based alliance that the price has not already started to rise. And if tensions in the Middle East escalate any further, no amount of politicking may be able to keep the cost of crude from rising back to the target of around $28-$30/barrel.

Representing less than 49¢/gal. of the cost of gas at the pump back in October, even if the cost of crude doubled from that higher October rate -- a highly unlikely scenario -- that alone, at least in theory, should not press the price of gas at the pump here in the U.S. beyond $1.79/gal. But, as we mentioned earlier, prices in at least some places in the U.S., especially in the mid-West, went well above that last year.

Some industry and government analysts attributed the higher cost in the mid-West to a then-new "formulation" policy -- the framework used which dictates how various grades and types of gasolines are to be manufactured. In the mid-West, a new policy dictated that a greater percentage of ethanol -- fuel derived from plant material, particularly the abundant corn available in the mid-West -- would be used in all grades of gas. But other analysts saw something a little more insidious at work ... plain and simple price-gouging.

Whatever the reasons -- again, at least according to the laws of supply and demand -- neither the price of crude itself, nor the taxes levied on gasoline, should force a price at the pump above $1.50/gal. ... and that is a liberal figure. Even if crude went back to the $30/barrel level and taxes remained constant, that would only account for a price at the pump of about $1.40/gal.

Of course, whether or not that economic theory plays out in the real world remains to be seen.

If you would like to submit something for our AutoMotives feature, or if you simply would like to suggest something you think we ought to cover, e-mail us at ... autotravel@downstreetmagazine.com.