Image: San Francisco gas station
Justin Sullivan  /  Getty Images file
A San Francisco pedestrian checks out gas prices in early November. If you live there, it's probably a lot cheaper to walk too.
By
updated 12/4/2007 7:39:22 PM ET 2007-12-05T00:39:22

Drivers in San Francisco enjoy views of the Golden Gate Bridge, with scenic stretches of the Pacific Coast Highway to the south and the rural shoreline to the north.

And they pay for it at the pump.

There, the average cost of a gallon of regular unleaded gasoline reached $3.546 at the end of November, up from $2.524 a year ago.

Things don't look much better in other parts of the state. San Jose, San Diego, Sacramento and Los Angeles posted the country's next-highest per-gallon prices, respectively, according to Gasbuddy.com, a Web site that tracks gas prices nationwide.

Such high prices are not confined to California. Among the country's 40 largest metros, New York City, Buffalo, Seattle, Miami and Chicago rounded out the top 10 priciest places to buy gas.

The surge at the pump is the result of rising crude oil prices, which have grown significantly since 2004, when a barrel sold for $26. On Wednesday, a barrel went for $93.

Still, west coast drivers are hit hardest. Those in cities like San Francisco and Los Angeles pay more at the pump than those in Houston or Dallas, where the average price per gallon Wednesday was $2.90 and $2.923, respectively, due to such factors as fuel taxes, environmental standards and costs of business like regulatory burdens and taxes.

What’s more, the difference between, say, San Francisco and Houston is more pronounced this time of year since California requires cleaner fuel year round. Texas, like many Southern and Midwestern states, eases up on such requirements during the winter months when consumption slows. California's higher environmental standard increases refining costs, which get passed along to the consumer.

Crude oil's output is heavily influenced by the 12-member Organization of Petroleum Exporting Countries, each of whose yield makes oil such a volatile commodity. For example, in November crude oil approached $100 per barrel due in large part to Mexico cutting a fifth of its crude-oil production. Also affecting prices? The weak U.S. dollar. Because oil is traded internationally in dollars, much of the per barrel price increase over the last few years also has to do with the slipping greenback.

Last week crude hovered around $93 a barrel, and crude futures are starting to dip below $90, as OPEC is expected to increase output, which in turn will lower prices. OPEC restricts output to keep prices high, but it isn't in its interest for prices to skyrocket because this would dent consumption.

Some hope rising oil prices might increase acceptance of corn-based ethanol as an alternative, green energy source, but the ethanol market has its own problems.

This year, $7 billion was spend in federal biofuel subsidies, resulting in a 20 percent increase in acres of corn planted. Investors, looking for a fast buck, have in turn produced far more corn for ethanol production than there is blending capacity or consumer demand.

A flooded market has made it more cost effective for ethanol producers to hold on to their supply than to sell it. Some factories in North America and Australia have shut down completely as a result. It's a market in disarray.

"Initially, [the subsidies] looked like a pure handout, but now it looks like its suckered investors into losing a lot of money," says Michael Liebreich, CEO of New Energy Finance, a London-based analyst firm. "Right now oil could be at $120 [per barrel] and it wouldn't make any difference ... the speed that the private equity industry poured money into the industry is beyond its profitability."

The national price average for for E-85 — an ethanol gasoline mix — is $2.478 a gallon, according to the American Automotive Association, but when that figure is adjusted for energy generated by volume, E-85 costs $3.261 per gallon. Based on figures from the Energy Information Administration, E-85 generates about 25 percent fewer BTUs (energy unit) than does gasoline and, at its adjusted price, costs about 16 cents more per gallon.

There are, at present, about 4.4 million flex-fuel cars on American roadways and less than 1 percent of American service stations offer E-85.

Unless huge oil fields are discovered in America, the solution to lower gas costs, experts say, lies in efficiency of consumption. From a city planning perspective, step one is reducing congestion. In its 2007 "Urban Mobility Study," the Texas Transportation Institute (TTI) estimates that drivers in the nation's 437 urban areas wasted 2.9 billion gallons of fuel last year due to traffic delays.

Expanding roadways and building better transit systems relieves congestion, but both are costly. Some say improving traffic efficiency can be a much cheaper way to lessen congestion. Two ways to do this: systems such as service patrols, which comb heavily trafficked areas and help stranded motorists and ramp monitoring systems, which involves the installation of traffic lights on entrance ramps that regulate the frequency with which cars enter a freeway or highway.

"There's room for us to expand upon our management of the system," says David Schrank, co-author of the TTI study. "We can make our operations much more efficient through things like service patrols or ramp metering ... very few areas that are managing 100 percent of their system, and there's room to improve on their management by going beyond the freeway to the arterial streets."

© 2012 Forbes.com

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