What Accounts for the Spike in Gas Prices?

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Gas prices rose another cent on Saturday to $3.96 a gallon nationwide. The high prices are already prompting thousands of SUV owners to try and dump their gas guzzlers. Andrew Leonard, who writes the "How the World Works" blog for Salon.com, talks with Guy Raz about all the things that affect prices at the pump.

GUY RAZ, host:

Gas prices rose another cent today - $3.96 a gallon nationwide. Here in Washington, D.C., it's $4.20 a gallon. The high prices are already prompting thousands of SUV owners to try and dump their gas guzzlers. To find out what goes into that gallon of gas and why it costs so much, we turn to Andrew Leonard. He writes the blog How the World Works at Salon.com. Welcome to the program.

Mr. ANDREW LEONARD (Blogger): Thanks for having me.

RAZ: Andrew Leonard, break it down for us. What makes up the four dollars and change we're all now paying for a gallon of gas?

Mr. LEONARD: Well, I think there are four basic parts: there's the cost for the crude oil; there's a cost of taking that crude oil and refining it into gasoline; there's the cost of getting that gasoline from the refiner to the local dealer - your filling station; and there tare taxes, your excise taxes the government charges to fund various highway projects, and you have your sales taxes.

And if you break that down in price, it's pretty illuminating. Because you take, you know, the average price in California this week was $4.09. About 66 cents of that is taxes, 25 cents is the refinery margin - what it costs to turn it into gasoline and the profit the refinery takes - and another nickel is the dealer margin. All the rest of it is the cost of the crude oil, which is about 75 percent.

RAZ: Now, the two most popular theories about why gas prices are so high - blame price gouging, for example, by the oil companies - or environmental regulations that limit refineries and the capabilities of refineries. But you're saying that neither of these tell the whole story.

Mr. LEONARD: The price of oil is made up of a multitude of factors, and it would be foolish to say that oil company greed or environmental regulations played no role. But they don't play even the majority role.

I mean, the first thing to understand is that oil companies do not set the price of oil. That is set at the open market by buyers. And it could be hedge fund traders looking to speculate on rising prices, it could be refineries, it could be the Chinese government. It's a wide spectrum.

And right now there are more buyers than there is supply.

RAZ: Why are there more buyers than supply?

Mr. LEONARD: Well, there's a few reasons for that. One is we are witnessing a major historic economic story in the world today, which is the emergence of affluent middle classes in China, Brazil, India - billions more people who want to drive, who want air conditioning, who want what Western Europe and the United States has had.

That, combined with a supply that has essentially been stagnant for the last few years, creates a big disjunction.

RAZ: Andrew Leonard, you write in your article that oil companies, as we know, are making record profits. But those profits come from drilling oil. They're actually losing money on gasoline. How does that work?

Mr. LEONARD: Well, if they own the refinery - I mean, some refineries are independent, some are owned by the oil companies. In the case of Chevron, which controls about 25 percent of the refinery market in California, Chevron did make record profits the first quarter of 2008 - $5 billion they made. But their refinery operations actually are losing money. And one reason for that is that they can't raise prices at the gas pump as fast as the price of oil is going.

RAZ: Why is that?

Mr. LEONARD: Well, ironically because that raises the chance that they'll lose even more money, because people do respond to gas prices. Americans are driving less. So, if people start buying less gas, it makes it even harder for them. If they raise the prices even more, people consume even less.

RAZ: Andrew Leonard is a staff writer at Salon.com. He writes the blog How the World Works. Mr. Leonard, thank you.

Mr. LEONARD: Thank you.

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