What Impacts Gas Prices?

Susan Kelly Updated on Sep 21, 2022

The high price of crude oil is a significant contributor to the high price of gasoline. The oil cost largely determines the price of ordinary gasoline. Distribution and marketing, refining, and taxes account for 57% of the total revenue. The prices of these inputs don't fluctuate nearly as often as oil prices. When there is an increase in the price of oil, you should also anticipate an increase in the price of gasoline at the pump. Over a year, a change of $10 in the price of oil (per barrel) will result in a $0.25 increase in gasoline (per gallon).

Supply and Demand

Gas and oil prices are affected by supply and demand; much like the prices of most other commodities you may purchase. Prices go up whenever there is higher demand than supply, and vice versa. For instance, in 2014, the discovery of new shale oil deposits in the United States led to a surge in oil supply, which resulted in a decrease in the price of gasoline. However, this boom was reversed when low prices caused many companies to quit.

Other factors, including seasonal demand, are also affected by oil and gas prices. During the spring, gas prices often go up. Because more people are traveling by car during the warm summer months, there is a higher demand for gas. In addition, the regulations mandate a switch to summer-grade gasoline, which increases production costs.

Commodities Traders

Commodity traders, who deal in things like gasoline, wheat, and gold, also contribute to high gas prices. On the commodity futures markets, they purchase oil and gasoline. Companies can acquire gasoline contracts for future delivery at a price previously agreed upon, thanks to these marketplaces. However, most traders have no intention of ever becoming owners. They intend, rather, to make a profit by selling the contract to a third party.

The fluctuations in the value of these futures contracts affect gas and oil prices. The price depends on the purchasers' expectations of the price of gas or oil in the next years. The trading of commodities in this manner results in a self-fulfilling prophecy, which in turn causes an asset bubble. You, however, will be the one paying for this bubble when you go to fill up your gas tank.

The Value of the Dollar

When the value of the United States dollar falls, prices for gas and oil also tend to climb. Because of the huge decline in the dollar value during that period, oil prices increased between 2002 and 2008. This was a contributing factor in the decline in oil prices that occurred between late 2014 and 2016. The OPEC members could increase their profits while maintaining the same level of supply because of the dollar's strength.

Factors That Force High Gas Prices To Drop

An increase in gasoline demand between April and September often results in a corresponding rise in gas prices. Prices tend to drop during the winter since there is less transportation demand and lower manufacturing costs. This price fall even cancels out an anticipated rise in demand for home heating oil in northern regions of the United States during the winter months.

When there is an increase in supply, gas prices often go down. This may take place in a wide variety of methods; for instance, OPEC could decide to release more oil, or shale oil producers could discover another major deposit or adopt new technologies.

The influence of these variables on commodity traders is the most crucial aspect to consider. They will not bid up the price of futures contracts if they expect that prices for oil and gas will go down. They may even locate another investment opportunity, which would increase prices.

How Can We Reduce Gas Prices?

The most important step we can take right now is to reduce the amount of gas we use by decreasing the number of miles we drive or improving our fuel economy. Keeping your tires inflated is a simple technique to increase your vehicle's economy when using gasoline. Keeping a car's engine properly tuned may result in a 4% improvement in the vehicle's overall gas efficiency.

People who live in cities have access to public transportation. Others may relocate to reduce time spent traveling to and from work. By converting to cars that run on alternative fuels, we can reduce our dependence on fossil fuels like oil and gas over the long term. Would these initiatives affect the current high cost of gas? Perhaps, but only if they are maintained for a considerable time.