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Why is gas so expensive? Laments over the painfully high price of gasoline fuel can be heard around the globe in any given year. In particular, the last decade has seen record-breaking spikes taking an ever-larger bite out of people’s incomes, in the U.S. and abroad. What’s going on?

Gas is expensive largely because the crude oil on which it is based is expensive. And the price of crude oil in the global marketplace is tied to supply and demand.

<h2>Major Price Factors</h2>
According to the Institute for Energy Research, there are four components that go into the price of gasoline. The single largest and most important component, affecting 70 percent of the final figure, is the price of crude oil on the global market. This price can change fairly rapidly over time because there are so many volatile factors involved. The price of crude is subject to the economic laws of supply and demand.

The next largest proportion are public taxes. Then there are distribution and marketing costs – how much it takes to get the gasoline to consumers. Finally, there is the cost of refining crude oil into gasoline. Barring abrupt policy changes or operational issues, these latter factors tend to be relatively stable over time compared to the price of crude.

Aggregate supply or demand for oil, unlike natural gas, for instance, is globalized, so the supply/demand situation for a given country does not directly determine the rates its residents receive, although it does make an indirect and partial contribution. Consequently, contrary to popular myth, the U.S. government cannot set the price of gasoline for American citizens, and in fact can do very little about its fluctuations.

<h2>Supply and Demand</h2>
So, gas is so expensive largely because crude oil is expensive. But that’s just the beginning of the story. The price of crude is influenced by numerous factors – commodity markets, political events, natural disasters, currency rates, and more. These factors each have an impact on supply and demand for oil. Other things being equal, prices rise when demand rises or supplies decline. All else being equal, prices fall when demand falls or supplies increase.

In a nutshell, crude oil is expensive because global supplies are affected by short-term and long-term events that threaten their stability and abundance. The world constantly experiences short-term events that reduce the supply of crude oil, from political disruptions in oil-producing regions like the Middle East to natural disasters to sanctions on producers like Iran. Such episodes are responsible for much of the volatility of crude on the world market.

Long-term extraction trends aggravate the volatility of today’s supplies. Because producers have largely exhausted the low-hanging fruit of crude oil, the cost of extraction is always rising. Today’s crude is coming from more and more difficult, peripheral environments, like the Canadian tar sands. Yields are heavier and more sour, rather than light and sweet. Wells are less productive and methods of extraction are increasingly energy-intensive.

From an economist’s view, then, high gas prices make a lot of sense. Supplies are often restricted, and demand is pretty much always high, because virtually every economy in the world depends on oil and gasoline for growth. Moreover, the level of established demand in the United States, a long-industrialized country, is already high and thus more difficult to sustain. Economic growth only increases demand, and high demand means high prices. As the world’s economies continue to expand, so too will demand for energy resources like oil.

Given these factors, it is extremely likely that gas prices will remain high relative to the supply and demand for oil.

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