Getting A Grip On The Cost Of Gas

By Lisa Smith AAA

For the past several years, motorists around the world have felt the squeeze from rising oil prices. While consumers in the United States have expressed displeasure with gasoline prices, the cost for fuel in Germany, Turkey, Denmark, the Netherlands and the United Kingdom is even higher, largely due to heavy governmental taxation designed to discourage consumption.

Increased global demand, shrinking supplies, limited refining capacity, the lack of investment in new refineries and regional instability in the Middle East have lead to significant pain at the pump - and it could get worse. In this article, we'll outline a few methods to help you minimize the seemingly unavoidable cost of fueling up.

How Did We Get Here?
In the United States, the average cost of a gallon of gas jumped from just over $3.37 on July 1, 2012, to more than $3.85 per gallon at middle of September. While recently gas prices have lowered (now closer to $3.40 a gallon), gas prices have been trending higher over the past decade, as shown in the chart below.

U.S. Regular Conventional Retail Gasoline
Date Cost Per Gallon
Aug 4, 2003 $1.54
Nov 30, 2004 $1.86
Dec 1, 2005 $2.10
Nov 6, 2006 $2.15
Sep 4, 2007 $2.80
Oct 11, 2008 $3.11
Nov 18, 2009 $2.61
Sep 16, 2010 $2.75
Oct 24, 2011 $3.45
Aug 22, 2012 $3.74
Source: GasBuddy.com

Rising gas prices put a spotlight on the cost of crude oil, which jumped from less than $2 a gallon to more than $3.50 in the last 10 years. It has been hovering around this price, and a look in the rear-view mirror shows that oil prices will likely continue to increase.

Many economists expect oil to remain pricey due to the following:

  • Limited pumping capacity
  • Limited supply of quality oil
  • Increased worldwide demand
  • Limited refining capacity

According to reports by Thomson Financial, most OPEC members are pumping at near-full capacity. Capacity can be increased, but doing so is an expensive proposition that won't likely be undertaken in response to short-term spikes in demand. Furthermore, some of the reserve oil that can be brought to market is of lesser quality and requires additional refining. This creates yet another challenge, as new refinery construction is largely stalled (particularly in the U.S.) due to ecological and quality-of-life concerns.

With the burgeoning economies in China and other emerging markets creating a sustained increase in the demand for oil, lower gas prices do not seem to be on the horizon. The Russians underscored the international appetite for oil in August 2007, when they planted a flag on the seabed in the Arctic to lay claim to the oil rich region and pave the way for future deep-sea drilling.

Solutions?
From the consumer's perspective, the easiest short-term solutions to the gas crisis would involve government intervention. According to the Energy Information Administration (EIA) which provides official energy statistics from the U.S. government, approximately 19% of the cost of gas is attributed to federal and state taxes. The remaining cost of a gallon of gas is accounted for by gasoline distribution and marketing, which accounts for 9% of the cost filling your tank, refining the oil, which accounts for 19%, and cost of crude oil, which accounts for 53% (using 2005 data).

A tax on windfall corporate profits is another possible way to reduce gas prices. The biggest players in the gasoline industry are booking record profits quarter after quarter. When the staggering profits generated by oil companies are viewed in light of the percentage of the price of gas that is accounted for by the price of oil, it is clear that these firms have plenty of room to reduce the cost of gas and still make a profit. At the present time, elimination of the gas tax and the implementation of a tax on windfall profits are both extremely unlikely.

On a slightly more promising front, efforts are underway to develop alternative fuels. Unfortunately, there are no quick fixes on the horizon. Ethanol, which can be made from corn or sugarcane, is the alternative currently capturing the most attention, but it is costly to produce. By some estimates, it takes a gallon of fuel to produce a gallon of ethanol. In addition, the large amounts of corn earmarked for ethanol production has downstream impact on the cost of food for farm animals and humans. So far, ethanol cannot yet be produced in quantities that are particularly meaningful for widespread use, and has done little to reduce the cost of fuel for motorists.

What You Can Do

If you don't want to put your hopes into a dramatic reduction in gas prices generated by government or industry, there are still steps that you can take to address the situation on your own. The purchase of a hybrid vehicle is one path you can choose. These increasingly popular cars dominate the top portion of the Environmental Protection Agency's list of "most fuel-efficient cars." They sip gas, are "good" for the environment, and get you where you need to go as well as any other vehicle. On the downside, hybrids are expensive to purchase and may cost more to insure and fix. (To compare a hybrid to a standard model car of your choice, check out the U.S. Depart of Energy's Cost Calculator.)

A study by Edmunds reported that gasoline would need to be priced at $5.60 per gallon, and a driver would need to log 15,000 miles (24,000 kilometers) per year over each of five years for the Toyota Prius to become a break-even proposition when compared against a selection of other economy cars. Of course, if you trade an SUV for a hybrid, the scale would tip in your favor much sooner.

If a hybrid isn't in your budget, perhaps you can take a cue from Europe. The cities over there are packed with tiny cars, scooters and motorcycles. If you are ready to trade in your super-sized sport utility vehicle, six of the top 10 most fuel-efficient (according to the Environmental Protection Agency) vehicles sold in the U.S. for 2008 aren't hybrids:

  1. Toyota Prius
  2. Honda Civic Hybrid
  3. Nissan Altima Hybrid
  4. Toyota Camry Hybrid
  5. Ford Escape Hybrid/Mercury Mariner Hybrid/Mazda Tribute Hybrid
  6. Toyota Yaris (manual)
  7. Toyota Corolla
  8. Honda Fit
  9. Nissan Versa/Scion xD
  10. Hyundai Accent

If you want even more fuel-efficient wheels, consider a motorcycle or moped. Mopeds may not be the flashiest vehicles on the road, but they sure are easy on the wallet at the gas pump.

Regardless of what you are driving, the best way to minimize the impact of high gas prices on your household budget is to reduce the amount of time you spend behind the wheel. Consolidate your trips; don't pick up the dry-cleaning until you also need milk and gas, and then do everything in the same outing.

You can also join a car pool or consider public transportation. Take the bus, subway or train, and buy a monthly pass - this guarantees a one-month price lock on your transportation expenses. If possible, walk or ride a bike. Not only do you get good exercise, but the trip is virtually free!

When Driving Is the Only Way
When there's just no alternative to driving to your destination, make sure your vehicle is ready for the road. Start by keeping track of your gas mileage. If it suddenly fluctuates, your car may need servicing. In the service arena, it pays to do the recommended maintenance to keep your car tuned and the tires properly inflated, as a well-maintained vehicle operates with higher fuel efficiency. It also pays to read your owner's manual. Filling your car with a higher octane gasoline than that recommended by the manufacturer is simply a waste of money.

Good driving habits can help you save money, too. In vehicle tests conducted by Edmunds.com, using cruise control was identified as an easy way to save gas, as was proper stopping and acceleration. Instead of racing up to stop signs and red lights, jamming on the brakes and then accelerating quickly when it is your turn to go, back off of the gas as you approach the stopping point and accelerate gradually when you pull out. Turning off the air conditioning helps as well, but not much. Also, watch your speed, as excessive speeding will also consume more fuel.

Before you pull into your favorite gas station and start pumping, pay attention to the prices offered by nearby competitors. Cross the street to save that nickel per gallon when the price is lower. And speaking of lower, take excess baggage out of your vehicle to lower its weight. You are paying for every pound you carry. Finally, talk to your employer about a flexible work schedule. Driving at off-peak times can cut down on the amount of time you spend in traffic and the amount of money wasted at the gas station.

The Bottom Line
Although the price of gas may be out of consumers' control, your choices will determine how much you spend. Using less gas is a surefire way to reduce your transportation costs - not to mention the financial stress that can result from rising prices at the pump.

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