Why is the price of gas so high?

When gas prices start to rise to astronomical levels, there’s a lot of chatter about gas rising to “$100 a barrel” and about supplies in the Middle East; but what, exactly, causes the fluctuations in gas prices and why do they get so high? We've got to have something for our fuel injectors and fuel pump assemblies to operate on! We’re going to discuss a very simplified version of how gas gets from the ground into your vehicle, and how the price changes along the way.

First thing to understand is that there are three different markets for oil: contract, spot, and futures. Each is influenced by different factors that affect the price of gas at the pump. The futures market is publicly traded on a sales floor like you see on Wall Street. The spot and contract markets are informal networks of people in the business.

The contract market is a market made up of agreements between oil companies and oil refineries.  Oil companies’ main business is in exploration to find new deposits of crude oil to drill. The oil companies drill for the oil and have contract agreements with oil refineries to decide exactly who gets the oil, and how much they get. Oil refineries play an equally important role. Oil doesn’t come out of the ground as the gas you put in your car – it must go through a process at the refinery to separate it out into the many petroleum based products we use, from gasoline and diesel to jet fuel and petroleum jelly. Refiners plan their business around how much oil they plan to get from oil companies laid out in the contracts. Because they know how much oil they will get beforehand they pay a premium which they pass on to their customers.

The spot market consists of the spare product oil companies have left over after fulfilling their contractual obligations. They will put the extra oil onto the spot market, and if a refinery needs extra oil they purchase it at a spot, or daily, price. Since there is no contract involved and there is never any guarantee whether or not there will be spare oil to buy on the spot market, prices are usually much cheaper than contract prices.

Oil futures are traded on the American Mercantile Exchange. The futures market represents the state of the entire oil market at any given time – thus it can be extremely volatile. When you hear reporters talking about the price of oil reaching $100 a barrel, they are speaking about the futures market. The prices of the futures market are driven by information; they are often referred to as speculative markets because the price can change violently purely on speculation. Most people buying and selling oil futures rarely want the actual barrels of oil, but just trade paper contracts in order to make money, much like the Dow Jones, Nasdaq, or other stock markets.

Refineries have played a large role in the increase of gas prices over the last few decades. There used to be over 350 refineries in the early 80’s, most of which were owned by oil companies. They saw refineries as an integral part of their business and not a place to make extra profit. Now there are only 153 refineries, the majority of which are independently owned and of course exist to make a profit. Gas coming out of a refinery is sold at a “rack price,” which is the cost of gas to dealers. This rack price is often influenced by the spot and futures markets, and can be further inflated when it is labeled by a premium brand. Branded gas is more expensive because it is perceived as being of higher quality than non-branded gas (which is typically untrue), but also because they have much more stable contracts and thus a more reliable supply of gas.

Gas stations also play a role in gas prices, but maybe not as much as you think. Some are owned outright by the oil companies, where some are leased by dealers who sell one particular brand of gas.  There are of course plenty who are independent and sell unbranded gas as well. Branded gas stations have a contract that states a minimum amount of gas they must buy where unbranded stations get their gas wherever they can – obviously as we discussed before the uncontracted gas will be less expensive, and thus allows independent gas stations to get the gas cheaper.

At oil-company-owned stations, the oil company decides the price of gas, and that’s what is charged. With leased gas stations, the oil companies sell the gas by the DTW or Dealer Tank Wagon. The DTW price is set by the oil companies and is driven by the spot and futures markets. Oil companies decide what to charge by looking at their competitors stations in the same market. Lessee’s can’t negotiate the DTW price because they signed a contract saying they have to buy a certain amount of gas, but the oil companies allow them to tack on a profit margin from 3-10 cents per gallon to guarantee income. The gas stations can’t go crazy with the profit margin however because they are still in heated competition with the other gas stations in the area and might lose business if they charge too much.

Lastly, taxes make up about 18% of the price of gas depending on what state you live in. California in particular has more expensive gas because California has passed restrictions that require even cleaner burning fuel than the rest of the nation, which is more expensive to refine and in shorter supply.
So, as an example, for every dollar you spend the price of gas might be broken down like this:

Taxes: 13 cents
Distribution and Marketing: 8 cents
Refining: 14 cents
Crude oil: 65 cents

As you can see, what determines the price of gas is involved and complicated, even in this over-simplified explanation. No one entity has complete control over the price of gas (although there are some, like the Organization of Petroleum Exporting Countries/OPEC, who have more control than most). Next time you’re at the pump and you’re frustrated about the high price of gas, see if you can follow down the chain to see what caused the recent inflation so you know where to rightly target your angry letters.

Awesome Charity Gives Rides and Hope to Cancer Patients

As much as we all like to drool over supercars, the individuals that own them often have a bad reputation. Hearing that turbocharger or supercharger roar as they blow past us on the freeway doesn't make us like them a whole lot. It also takes a tremendous amount of wealth to buy a Ferrari, and the reality is most of us will never have access to the kind of funds required to spend hundreds of thousands of dollars on a car. One charity in Texas however is using that wealth (and time, which many people who can afford these machines also have in abundance) for a truly good cause: picking up cancer patients in supercars and taking them to the hospital for treatment.

 People undergoing treatment for cancer cannot simply drive themselves to appointments. Chemo leaves patients dizzy and feeling generally awful. It requires frequent trips to and from the hospital, and arranging transportation can be difficult. One cancer survivor in Austin noticed how many cancer patients were on the bus trying to get to treatment appointments, and dreamed up the idea to offer a service to get patients to those appointments – in style, if they so desired.

So Your Ride Is Here was born. It is a service that recruits supercar owners who want to help cancer patients get to the hospital. They ride in all kinds of specialty, classic, and luxury vehicles like the Ferrari Enzo, Aston Martin Rapide, and Chevrolet Camaro. It gives cancer patients the chance to enjoy something fun and forget about being sick for a short while. Even for those who are not car enthusiasts, the charity raises money to pay for any kind of private transportation service to help patients get to their appointments.

If you own a supercar and live in or around the Austin, Texas area visit their website to learn more about how you can help this awesome charity. If you don’t own a supercar, you can also donate money to help cancer patients get transportation anyway.

This is a great way to give back and, as an added bonus, might help the public forgive supercar owners a little for being so wealthy. So if you see a Ferrari driving down the road with a beaming patient in the passenger’s seat, try to reserve just a little judgment and thank Your Ride Is Here for granting smiles to someone who needs it.

Autonomous Vehicles

If you’ve been reading the news in the last few months, you might have seen mentions here and there of  autonomous vehicles. Autonomous vehicles are cars that drive themselves without human input. The vehicle would be used much like a car with a car navigation system with an in dash navigation screen - you would climb in, input your destination, and the car would take you there. This is not a new concept, but lately the concept has garnered a lot of attention because a few companies have built working models. Have you ever stopped to think about what changes autonomous vehicles might bring?

 There are a lot of advantages to taking the human out of the equation of everyday driving. Computers are much more precise and do not get tired, upset, or distracted. There would be drastically less accidents because of this fact alone. These cars would merge perfectly with other vehicles and maintain an exact distance between the cars in front of it. Have you ever seen the Pixar movie Wall-E? Imagine cars like all of the robots neatly slipping onto marked highways and speeding off in perfect regulation.

Problem is, humans driving on the road with autonomous vehicles would be a lot like antiquated Wall-E himself. Humans do not have the precision necessary to execute merging into a tightly knit freeway. Will there be a time where laws discourage, or outright forbid, people to drive their own cars on public roads?

 Another advantage however is getting to relax while the car drives for you. Even spending the night out drinking would not prevent you from climbing in your car and telling it to convey you safely home. The interior cabins of cars could look very different from automobiles today – the steering wheel, gauge panel, and shifter would all be unnecessary. The inside of a car could look like a cozy living room where people relax and chat while they get to where they need to go. You could lie down and take a nap, or text message to your heart’s content.

Many of us can think of instances where we have seen drivers on the road that should not be driving at all. Using autonomous vehicles,  being too young, too old, disabled, or just plain bad a driving would not bar anyone from safe and effective travel. The only people who might choose to drive their own vehicles are those that enjoy it – people who typically know the ways of the road well.

It is true that for the majority of Americans, cars are used as purely a mode of convenient transportation. Taking the stress out of commuting would improve quality of life for many people. There are bigger issues at hand, of course, like who is responsible in an accident when autonomous vehicles are involved. Nevertheless I feel autonomous vehicles will become a reality in the not-too-distant future.

Turbochargers in Family Cars

Turbochargers are used to make small engines put out a lot of power while still remaining fuel efficient. Beyond BMW turbochargers and Audi turbochargers, even family cars offer turbocharged models these days. Before you get a turbocharged vehicle there are a few things you should be aware of.

Hyundai Sonata Turbo

 A turbocharger or “turbo” is a purely mechanical device that boosts engine power by pushing air into the engine. This allows the engine to burn more fuel with every revolution, making it more powerful. Cars without turbochargers are referred to as “naturally aspirated.”  Turbochargers allow automakers to decrease the size of the engine while maintaining the same amount of power and improve fuel economy.

A turbo is attached to the engine near the exhaust manifold. Gasses coming directly out of the engine pass through the turbo first, spinning a turbine inside at thousands of revolutions per minute. The turbo uses this power to pressurize the fresh air going into the engine, forcing more air in than it would normally.

It’s like a pair of big fans, one being driven by the exhaust gases and the other pushing air into the engine. The fans are connected so the exhaust gasses spinning the first fan also spin the fan pushing the fresh air into the engine. The cars computer reads the increased oxygen coming into the engine and thus compensates with more fuel to create the proper air-fuel mixture. This makes the explosions in the cylinders bigger and more powerful, thus making the engine more powerful.

It is desirable because you get an increase in power and fuel efficiency. The turbo is driven by the exhaust gasses so it only goes as fast as your engine’s output of exhaust; so basically it only works hard when you need it to.

The downside is, in the beginning turbos got a bad reputation for failing frequently. They had also been known to “lag,” meaning there was a slight delay between the driver pressing on the gas and the turbo pushing more air into the engine. Both problems have since been addressed through advanced new designs and modern technology. It is true however that turbos have more parts than naturally aspirated engines, which make them more expensive to manufacture. This usually translates to a higher price tag.

Many modern vehicles come with turbocharged models. Volkswagen, Ford, and Chevy all have family cars on the market that have turbocharged models for sale. By providing more power and greater fuel economy, turbocharged vehicles are a great option for today’s families.

Source: Aol Autos

Automakers eye next huge market: Iraq

While many have been extolling the huge market potential for autos in China, a few automakers have set their sights in what is quickly becoming the fastest growing market for autos in the world – Iraq. This is certainly good news for all of the OEM manufacturers for AC compressors and air conditioning parts. They have the fifth-largest oil reserves in the world, and a population bigger than Saudi Arabia’s. Western vehicles were banned while Saddam Hussein was in power, but with that issue taken care of, VW GM and Ford have flooded in to provide vehicles for an expanding market.

 Rising incomes and declining violence are the main factors affecting this huge change in lifestyle for Iraqis. Although things are better than they were six years go, 1500 people were killed last year because of bombs, sniper ambushes, and other related violence. That is shocking, but compared to the 34,500 death toll in 2006, the improvement is felt in the quality of daily life for Iraqi citizens.

Iraq’s economy is set to grow by over 10% this year as oil revenues and foreign investment boost the economy. Minimum wage has risen from $2.60 a month during Saddam Hussein to $400 a month now. Rising incomes combined with a population of more than 30 million people create a very attractive potential market for automakers.

Underpass in Baghdad

 There are still many hurdles to overcome before Iraq’s market potential can be realized however. Poverty and violence still persist. Iraq’s economy will probably grow to the equivalent of $3528 per person this year; compare this with Saudia Arabia’s $20214 per year and you understand how far Iraq still has to go. Unemployment is an alarming 40%, four times higher than the official report of 11% according to the World Bank.

Even so, things are definitely looking up and automakers are trying to get in on the ground floor. As Iraq’s economy continues to rise VW, GM, and Ford will be poised to take advantage of a growing middle class in Iraq.

Source: Bloomberg

Consumer Report’s review Death Toll for Fisker?

After having their shiny new Fisker Karma shut down completely after 200 miles on the odometer, Consumer Reports was finally able to finish their testing and write a complete review on the vehicle. If you've ever had issues with your navigation unit or engine control module, you know how frustrating it is to try and solve weird electrical problems. Consumer Reports couldn't even begin testing on the Karma before battery issues bricked the car in their parking lot. Their summary after getting it back from the shop: not good.

While the design is lauded as “simply stunning,” the gasoline engine when activated is noticeably loud. Its heavy 5395 pound body doesn’t help the handling department, and the touch screen has a grayscale look and requires so much menu flipping it “makes MyFord Touch look like a brilliant design.”

During testing, after they got it back from the shop of course, the speedometer and energy meter display disappeared when driving, on top of having several other rogue warning indicators appear during the week. These included the ESC, ABS and brake warning lights. There is also an intermittent warning tone and light that indicates an overheating situation; the warning lamp illuminates, then instantly turns off. 

Oh, were you using these? Sorry.

 What’s more troubling is that Consumer Report’s experience with the Karma is not isolated. Only 500 have been shipped and there are already dozens of complaints in all available outlets, with a range of sometimes mysterious issues.

One person couldn’t put their car into drive, tried to reboot the system several times to no avail, and had a technician come out and do a hard reboot. While this finally enabled the car to get into drive, the person then drove their kids to school and became stranded in the school parking lot with the same issue – even after a hard reboot, the car would not be put into gear.

One customer reported that their Karma required a completely new differential with only 1000 miles on the odometer because of a worn-down coupling between one of the motors and the wheels.

By far the most disturbing report is of a Karma owner that had their vehicle shut down completely while driving 35mph – all of the lights on the dash illuminated, the brakes would not work, and they had directional control of the vehicle only. While the other issues are indeed irritating and not acceptable for any brand new vehicle, paying $108,000 for a death trap is outrageous.

 With all of this information pouring in, there are many who have stood up for Fisker, saying that any brand new vehicle from a brand new manufacturer with new technology is going to have birthing pains. They also state that in order to keep up with strict deadlines in order to receive funding, some of the details in making the Fisker had to be rushed.

I don’t know about you, but funding or no funding I don’t feel rushing to get something out the door is ever appropriate when lives are at stake. While I understand this is a new company, selling a vehicle that is not completely developed is not only dangerous to consumers, but very damaging to the company’s image and future.

Hopefully Fisker will address these issues (there have already been two recalls on the Karma), but either way no one could get me to purchase one of these buggy, albeit beautiful, deathtraps.

Cameras that keep uninsured motorists from getting gas?

 Britain is famous for many things: double decker buses, Big Ben, the British Royal Family… and an extraordinary network of surveillance cameras. Everywhere. On public street corners, in front of shops, even in some residential neighborhoods, the British government has cameras installed to make sure every infraction is caught on tape, including those expired registration tags you forgot about awhile ago. Unfortunately for you, that little memory relapse may now prevent you from putting gas in your car, if a new proposal gets approved in the U.K. Forget about filling up that F350 dually you're trucking around England in - your diesel injectors and diesel turbo parts will be running on fumes.

 Installation of cameras at gas stations have special scanners that record license plates, originally installed to prevent people from filling up at the pump and speeding away (just making a pay-before-you-pump system as we do here seems to work well, but hey, who are we to judge). They are now thinking of using these scanners and linking them to the Driver and Vehicle Licensing Agency (their version of the DMV) database to cross reference plates to valid registration and insurance. No insurance, no gas.

I see what you're doing there.

This is a big problem for the 1.4 million, or 1 in 25, uninsured drivers in the U.K. This would be an even bigger problem for the 1 in 7 uninsured motorists we have in the United States – that’s a whopping 27 million drivers. You might want to double check your own car insurance policy to make sure uninsured motorists are covered.  If it weren’t for American’s vehement opposition to being watched, I’m sure the DMV would love to implement this system here as well – think of the cash rolling in!

There are, of course, two sides to this argument. The first is that the government already has too much control, and they have no business telling people whether they can or can not put gas int their vehicle. On the other hand, car insurance is a legal requirement and by driving without insurance you are breaking the law, and putting everyone around you at risk.

Do you think preventing uninsured motorists from pumping gas is justified or wrong?