In 1850 nobody cared a whit for oil that oozed up from the ground. There were no drilling rigs, no pipelines, no refineries, no ocean tankers, no oil spills, no law suits and no wars fought to secure oil fields or oil reserves. But in 1859 in Titusville, Pennsylvania Edwin Drake struck oil and changes began that have transformed our country and our planet. It was not until nearly 100 years later (1952) that oil consumption exceeded domestic production and the U S started to depend on importing oil to meet demands.

Oil is used in the manufacture of products such as gasoline, heating oil, lamp oil, lubricants, plastics, Styrofoam, and many others. Today’s topic is gasoline. Gasoline prices are volatile and public awareness of those prices is acute. Price spikes and gradual reductions are sure to be discussed over coffee all over America. As I write this, gas prices are dropping.

Gasoline prices are dropping for two reasons. A minor reason is that the blend of gasoline sold in the winter is cheaper to produce. In summer months, producers have to use additives so that tailpipe emissions meet EPA standards. Not needing these additives in the winter results in as much as a ten-cent per gallon reduction. These different blends of gasoline have little to do with the performance of your vehicle.

The major reason for the drop in gas prices is the drop in the price of crude oil. Currently there is a glut of crude oil on the world market. The US is now oil independent, producing more than domestic consumption. Crude oil in storage in the US is about twice the normal amount, as a result, prices sink. For every $1 change per barrel of oil, gasoline prices change about 2.5 cents per gallon. Gasoline prices are related to crude oil futures contracts. At present crude oil is approximately $93 per barrel, which is down more than $15 per barrel from several months ago. Six months future crude oil contracts are around $90 per barrel, so the low gasoline prices will be with us for a while.

The American Automobile Association reported that the national average price of gasoline was $3.19 per gallon on November 14, 2013, down 25 cents per gallon from a year ago and down 15 cents a gallon from the previous month. Missouri was the state with the lowest average price at $2.85 per gallon. With the exception of Hawaii and Alaska the highest is California at $3.68 per gallon. Arkansas’s average was second lowest at $2.99 per gallon.

Part of the fluctuation in gasoline prices among states is due to differences in taxes on motor fuel. Arkansas’s tax rate is 21.8 cents per gallon for gasoline (diesel is 22.8 cents). Among the states our gasoline tax ranks 15th lowest. New York State at 50.6 cents per gallon is the highest and Wyoming is the lowest at 14 cents. Our neighbor, Missouri, is the sixth lowest at 17.3 cents per gallon. In addition to state taxes there is a Federal tax of 18.4 cents per gallon that applies everywhere. The combined Federal and State tax on gasoline in Arkansas is 40.2 cents per gallon. Approximately 15 percent of the price of gas in Conway goes for taxes.

Within Arkansas there are regional variations around that $2.99 average. At times, the same brand of gasoline varies as much as 10 cents per gallon within a few miles. On the same day Walmart (Murphy Oil) advertised a gallon of gas for $2.85 in Conway, $2.90 in Morrilton, $2.82 in Fayetteville, $2.90 in Russellville, $2.87in Little Rock, and $2.94 in Heber Springs. This variation among regions within Arkansas must be due to local competition

The Federal tax rate has not increased in 16 years although traffic has continued to grow. Although American motorists consume approximately 134 billion gallons of gasoline per year, usage has not grown in recent years and hence revenue is flat at a time when the need for and cost of infrastructure improvements have increased substantially. Increased fuel efficiency and to some extent changing driving habits due to the high cost of fuel have stifled revenue growth. In response, Arkansas passed a half-cent general sales tax increase last year to fund highway improvements. I believe that this is the first time that a statewide general sales tax has been used to fund Arkansas highways.

It is interesting to look at inflation-adjusted gasoline prices over the past century. In 1918, when records were first kept, the nominal price of gasoline was about 25 cents per gallon. Adjusted to today’s prices, this amounts to about $3.87 per gallon, which is the most expensive in history. Over the years, inflation increased but the nominal price of gasoline rose only slightly. In 1974 the nominal price was about 90 cents a gallon and the inflation-adjusted price was $2.00 per gallon. Then in 1981, because of conflicts in the Middle East and inflation, the nominal price of $1.35 per gallon adjusted to $3.47, the highest since 1918. The lowest price ever for gasoline (based on inflation-adjusted prices) was in 1998 when the nominal price was $1.00 per gallon , making the inflation adjusted price $1.50 per gallon. Of course, today the nominal price is the actual price and at the end of 2012 it was $3.56 per gallon, still below the all time high of $3.87 in 1918, but the highest of any time between these dates. Since the end of 2012 prices have declined once again. The price of gasoline in Conway is around $2.85 per gallon.

Low gasoline prices are the most effective non-government stimulus to the economy. Nearly every dollar not spent on gasoline by the general public finds its way to discretionary spending. American motorists consume approximately 134 billion gallons of gasoline per year. A one cent drop in the average gasoline price for the 134 billion gallons of gasoline consumed per year equates to over a billion dollars that is redirected in our economy.

I thank my friend Chris Spatz for editing and helping me with this article.

You can obtain more information on the economy of Conway and Faulkner County by going to the Pulse of Conway website (www.pulseofconway.com).