Over the past year, retail prices of gasoline and heating oil have increased by almost 50 cents per gallon. Diesel fuel prices have increased by more than 50 cents per gallon. One major cause of these dramatic increases in oil prices is the rising price of crude oil. In the United States, various types of crude oil are priced by using the price of West Texas Intermediate (WTI) crude oil as the benchmark. In early 2005, WTI prices were slightly above $42 a barrel, but by September 2005, they were at $70 a barrel. Oil prices have decreased then by a few dollars a barrel, but are still at historically high levels.
There are several factors that have contributed to the high oil prices we are experiencing today. The US accounts for between one fifth and one quarter of the world’s total oil consumption. With oil consumption steadily increasing in 2005, oil supplies were stretched and wholesalers bid higher to secure adequate volumes. During the same period, the value of the US dollar fell against the euro, further driving up the price of crude oil, which is traded in dollars. The war in Iraq also resulted in a sporadic oil supply from one of the world’s most important oil-producing countries. Finally, the damage to oil producing and refining infrastructure in the Gulf of Mexico and Gulf Coast area during Hurricane Katrina struck a critical blow to US crude oil production capacity.
High crude oil prices get passed on to the consumer in the form of higher gasoline prices. The cost of crude oil comprises almost 50 percent of the cost of a gallon of gasoline. The cost of refining crude oil and profit margins of oil companies account for approximately 20 percent. Distribution, promotion and retailer costs and profits account for about 10 percent of the cost. The remaining cost of gasoline comes from federal, state and county gasoline taxes.
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