Gas prices are up leaving consumers fuming while they are fueling. As a result, many people are looking for a reason prices have risen.
Online searches for “why are gas prices so high right now” jumped 120 percent last week, according to Google Trends. However, fluctuations in gas prices are usually not the result of one thing. Rather, they are a result of many elements.
To better understand those elements, we look at 10 factors that influence the price you pay for gas.
Crude Oil Prices
The price of crude oil is closely watched by traders and producers. The “black gold” is the foundation for gasoline production.
Changes in crude oil prices account for 56% of the fluctuations in U.S. gasoline prices, according to the U. S. Energy Information Administration (EIA). Global events, supply-demand imbalances, and geopolitical tensions all contribute to the volatility of crude oil prices.
Supply and Demand
Supply and demand play a pivotal role in determining gas prices. Increased demand or reduced supply can drive prices higher. As a result, consumer behavior and economic growth are significant factors in gas prices.
Currently, world demand for oil is “scaling record highs,” according to the International Energy Agency (IEA). That demand is being fueled by a surge in summer travel, increased power generation and an upswing in Chinese petrochemical activity. In fact, China is expected to account for 70 percent of growth in oil demand this year.
Refining and Distribution Costs
Crude can not go directly into your gas tank. It must be refined. That process, combined with distribution expenses add to gas prices.
As a result, refining capacity and maintenance impact the price at the pump. Typically, some refineries close in the Spring and Fall for maintenance. This Spring, twice as many refineries shut down for repairs and upkeep.
Taxes
Consumer outrage over gas prices often turns toward the government. However, market forces, rather than government action, have the greatest impact on the price of fuel.
The federal government takes just over 18 cents per gallon of regular gas in taxes. States also apply taxes to fuels. Those fees range widely from nine cents per gallon in Alaska to 61 cents per gallon in Pennsylvania.
Suspending gas taxes for specific periods has been proposed several times at the federal level. In addition, a number of states have declared gas tax holidays.
Exchange Rates
The exchange rate between the U.S. dollar and other currencies influences gas prices due to the global nature of oil trade. A weaker dollar can lead to higher oil prices, as we saw last month. Subsequently, gas prices also rose.
Geopolitical Events
Geopolitical events, including conflicts and supply disruptions, have the potential to significantly affect gas prices. That is particularly significant in oil-producing regions.
As a result, gas prices and shipping rates can spike due to international conflicts.
Weather
Natural disasters and extreme weather events can disrupt oil production, refining, and distribution infrastructure. Hurricanes and other natural disasters have historically impacted gas prices due to supply disruptions.
However, even temperature can affect gas prices, according to a Purdue University study.
Global Economic Conditions
Economic growth and recessions are major factors in the price of gas. During periods of economic expansion, demand for energy increases. As a result, gas prices usually rise. Conversely, economic downturns can lead to reduced energy consumption and lower prices.
OPEC and Production Decisions
The Organization of the Petroleum Exporting Countries (OPEC) produces about 40 percent of the world’s crude oil. In terms of oil exports, their impact is even greater. The coalition accounts for 60 percent of petroleum traded internationally, according to the EIA.
OPEC’s impact on oil and gas prices was dramatically demonstrated when it reduced supply unexpectedly in April. That led to a hike in oil prices. As a result, the price at the pump also jumped.
Speculation
Speculation can also affect the price of gasoline.
Speculators fill a limited role in the commodities market. They purchase contracts on the future value of a commodity such as oil. In essence, they are placing a bet on the future price of oil. As a result, excessive speculation can move oil and gas prices up or down.
Knowing the factors that influence gas prices will not lower the price you pay at the pump. However, it may prepare you for changes in that price. It will also arm you against disingenuous public figures who hope to capitalize on your frustrations by spreading misinformation.
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Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their cat – Pudge. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.
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