Gas prices in the last decade have been more volatile than the previous half century.
The extreme example was in Sept. 2007 to Dec. 2008, when prices soared 38 percent, then fell 56 percent, and then jumped 48 percent. But overall, the average gas price for the last 12 months was 78 percent higher than in 2000 (measured in 2011 dollars).
One thing that hasn't changed, however, is that the price of gas in the United States is almost entirely determined by the world price of crude oil. A simple rule of thumb is that the U.S. gas price will be about $1.20 above the price of crude. (Remember that oil is always priced per barrel, so divide that price by 42 to get the per-gallon price.)
Do oil companies control prices?
If they did, prices would never go down. In fact, the oil companies haven't even been able to maintain the $1.20 markup. It's been closer to $1.00 in the last few years.
Did speculators contribute to the current run-up in prices?
Probably, but the key point is that their impact is only temporary. Speculators can't use the oil, and storing it is costly. So the oil they buy will be back on the market in a few months.
Can the government do anything?
Not much. The country (thankfully) has a market economy where prices are set by supply and demand. Releasing oil from the Strategic Petroleum Reserve (SPR) would lower prices temporarily, but the SPR is only intended for supply emergencies. Over the longer term, we could ease restrictions on drilling, but the United States has only 2 percent of the world's proven oil reserves, so even a major effort would likely boost domestic oil production by only a few million barrels per day. That would boost world output about 4 percent, which is not enough for a big price impact.
What does the future hold?
Almost certainly more price fluctuations. Unlike most products, oil production and consumption can't change quickly or easily, so any supply disruption will cause a spike in prices because it takes a big increase to have any short-term impact. Producers and consumers eventually do respond in a big way to changes in oil prices, as we learned in the 1980s, but it takes years (perhaps a decade) to play out.
Secondly, the overall price trend will probably be up. Oil is getting more expensive to find and consumption is still growing-not in the West but in the developing world. In particular, China's GDP now exceeds that of the US and it likely will more than double in the next 10 years.
Then again, we economists aren't very good at forecasting, so take all of this with a grain of salt. :=)
(The author is a retired CIA economist who played a small role in the agency's analysis of the 1973 oil price hikes. He lives in Mason Neck.)
Editor's Note: Compare gas prices in Lorton with our Traffic and Gas tab.