Why Gas Prices Are Rising

It's not what you think. Drilling has nothing to do with it. Oil prices have little to do with it.

This is a story of conservation and content. The story is in the refineries.

The gas you use in winter is different from what you use in summer. It's different depending on where you live.

Gas used in the winter contains a lot of butane. Butane is cheap, but it turns to gas at about the melting point of water. That's why your gas cap has a “vapor lock” – it's trying to trap the gases in the gas in the tank, so they can be used, rather than blow away and be wasted.

What replaces butane in summer gas? Mainly ethanol. Alcohol. It can be made in the refining process, or it can be made in other ways. Ethanol costs more than butane. Some people pay as much as $250/gallon for it – if it's properly aged in the right barrels. But even the cheapest ethanol has a price higher than that of butane.

Ethanol isn't the only important additive for summer gas. There are many chemicals added to gasoline, at the refinery, designed to reduce pollution. I remember being a kid in the 1960s and being unable to ride a bike near a crowded road, because the smoke and pollution from ordinary leaded gasoline was completely intolerable. Now I can. Get up close to an idling car on a California street. It smells, but not nearly as bad as it once did.

The chemicals added for California and other urban places to help gasoline burn cleaner cost money. More money than butane.

Where does conservation enter into it? Demand falls as people conserve. Buy a smaller car, drive a little less, you use less gas. So does everyone. When falling demand hits an industry, margins get squeezed, and companies go out of business. A lot of refining capacity has been taken off-line the last several years. More may follow.

Now add global warming. Refineries have to guess when it will warm up, so they can change their blends to meet demand. This winter has been very warm in the U.S. I haven't seen a single snowflake in Atlanta, and there was only one multi-day freeze to protect the trees from insects. (Trees will die.) Point is, the formulation has to change earlier, and a refinery that has to re-tool for that has to spend money before it wants to.

Refineries have to recoup these costs across less demand than before. They have to recoup the cost of switching to more alcoholic blends. They have to recoup the cost of chemicals used to reduce pollution. They have to take more money out of each gallon they produce, even while their margins remain wafer-thin.

There is no quick fix. Drill, baby drill has delivered us a glut of natural gas, with prices half what they were a few years ago. Even Warren Buffett got caught out. But oil, and gas liquids, are only a part of the gas price equation.

We can produce more alcohol, for less. We can make it out of things other than food, which is called cellulosic alcohol. We can make it from algae. Scaling these efforts will help, but we're talking about something that's research intensive, capital intensive – it takes time.

We can also continue to conserve. I'm paying less than $10/week for gas, because I got a small car, I live intown, and I combine trips. Using less gas is money in your pocket. A smaller car pays for itself. Telecommuting and car-sharing save money. Bicycles, even electric ones, are fun. That won't have a big price impact, but it will be good for your own profit-and-loss statement. So shut up and do it.

Also, don't listen to demagogues. Don't listen to idiots who claim they can drop the price quickly, by simply drilling. Because gasoline doesn't come from oil wells – it comes from refineries. It's a complicated business, an expensive business, and a business that's falling around its boosters' ears. Refiners can export – and in fact the U.S. is a net exporter of refined products – but the problem won't be solved that way.

It will be solved by us. As we adjust our habits to deal with high gas prices, we'll find we don't care as much about gasoline, that there are better places to spend money, and the opportunity in fuel will create new solutions over the next decade.