Why do gas prices change so much?
Fully electric vehicles are here but most of us are still driving cars, trucks, vans, and SUVs that run on gasoline. This means the fluctuation of oil and gas prices is very much top of mind when the needle heads toward ‘E’ on the dashboard. One day, prices dip down to more affordable prices only to rise back up the next, seemingly at random. So, what makes gas prices change so much? There are three main factors that affect gas prices: supply, demand, and current events..
But wait, who determines gas prices?
Before exploring these factors, who is actually determining the prices of gasoline, anyway? Out of everyone involved in the process of sourcing, procuring, refining, and distributing oil, it can be surprising to find out that oil prices are actually set by commodities traders.1 These traders are made up of representatives of companies that use oil in their businesses. Because of that, the traders want to be able to control pricing to make more accurate budgets. Additionally, speculators are looking to make money on the fluctuation of the oil market.1
How much oil is there?
Traders set the price according to three factors, the first of which is supply. How much oil is available is determined by the Organization of Petroleum Exporting Countries (OPEC). When there is too much supply of oil in the world, prices will dip down a bit. For instance, the United States has been producing a large amount of oil thanks to the use of shale fields.1 In 2014, Saudi Arabia decided to produce oil at the same rate despite the above-average production in the US, causing prices of oil to drop.4 On the flip side, when oil is in short supply, consumers will notice prices increase.
How much oil do we need?
Demand is the logical factor to investigate next when setting oil prices. Traders assess how much oil is needed for things like heat, transportation, and electricity depending on the season and economic wellbeing of high oil-consuming countries.4 Seasonality is important because where countries are experiencing warm weather, travel tends to increase so gasoline is in high demand.1 In the winter, however, gasoline sales diminish and oil demand for heating homes is higher.1 Also, when the citizens of a country are doing well economically, they will have more vehicles, travel more, heat their homes more often, and generally consume more gasoline and oil.
Of course, nothing creates more fluctuation in the market than current global events. Whether there is a disaster in one part of the world or political unrest in another, if the means of producing oil could be impacted, prices tend to rise in anticipation of a shortage.3 The types of impact could be when crude oil supplies are disrupted, refineries can’t operate, or pipelines aren’t flowing.3 For instance, in 2003, the price of oil skyrocketed when the United States invaded Iraq because the country produced a lot of oil. The resulting instability made investors nervous that supply would be impacted.4
What else causes gas prices to change?
There are other details that can cause changes in gasoline pricing. Filling up your tank at a gas station located closer to a refinery will cost less because the gasoline didn’t have far to be transported.5Location is also important because some states have lower taxes (such as Alaska’s $0.08/gallon) and some states have very high taxes (like New York’s $0.51/gallon).5v Don’t blame the filling station for the prices though: many gas stations actually lose money on gasoline hoping you’ll come inside to purchase snacks and refreshments, which earn them much higher margins.5
At some point or another, everyone experiences some amount of sticker shock at the pump. However, the traders who set oil prices definitely have their work cut out for them. They have to consider so many factors and influences that could impact oil production, refining, and distribution – let alone consumption. So next time you fill up your tank, keep in mind that a lot of thought went into determining what you’re paying. And consider improving your fuel efficiency with these tips.
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