Large price swings at the pump are a result of fluctuating oil prices. Over the past ten years, the price of each gallon of gasoline has been largely influenced by the price of crude oil. Gas prices fluctuate daily, mirroring daily changes in oil prices. The remaining portion of the price of gasoline is made up of corporate profits, state and federal taxes, as well as refinery and distribution costs. In February 2022, 61 percent of the price at the pump was attributed to crude oil prices. Refining accounted for another 14% of the total cost of a gallon of regular gasoline, with the remainder going to distribution, marketing, and taxes. The minimum price of a gallon of regular gasoline across the country for the week beginning April 11 was $4.09, down 8 cents from the week before and up to $1.24 from the same period last year. Inflation is still rising, and Russia's invasion of Ukraine is still going strong, so gas prices have risen to record levels. Russian oil exports consistently place among the top three in the world. President Joe Biden declared the United States would prohibit the import of Russian oil in March 2022, which increased gas prices. The Department of Energy's announcement that oil would be released from the Strategic Petroleum Reserve at the beginning of April, however, caused prices to gradually decline.
How Gas Prices Have Been Affected by Oil Prices Historically
Since the financial crisis of 2008, oil and gas prices have been particularly volatile. Their relationship, including significant peaks and valleys over time, is depicted in the following graph.U.S. Gas Prices and WTI Oil Prices
Because crude oil is the primary component of gasoline, changes in the price of crude oil also have an impact on the price of gasoline. In the United States, West Texas Intermediate crude oil is used as a benchmark for oil pricing. Since the financial crisis of 2008, crude oil prices have fluctuated sharply based on this benchmark. 2022: According to AAA, the national average gas price hit a record high of $4.30 per gallon in March. Due to Russia's invasion of Ukraine, gas prices rose dramatically from the March 2021 average by $1.31. 2021: The average price of regular gas was $2.39 per gallon in late January, rising to $3.39 per gallon in early November. 2020: In April, a global pandemic and a price war on oil contributed to driving the price of oil below zero, to almost -$37 per barrel (/b). However, a technical imbalance in the futures market was to blame for this unusual occurrence. Massive selling of contracts about expiring was fueled by speculative investors who were long oil but had no intention of taking delivery. Oil prices then began to rise, but until June, when they recovered to $40/b, the cost of regular gas remained below $2 per gallon. When oil prices recovered to $40/b, gas prices increased, bringing regular gas to $2.17 per gallon. 2015: By the end of the year, prices were below $37/b, which caused regular gas prices to drop below $2/gallon at the beginning of 2016. For the majority of the following five years, the price of regular gas stayed between $2 and $3 per gallon. 2011: In April, the price of oil climbed to about $113 per barrel. Prices for regular gas rose to $3.96 per gallon the following month. For the majority of the following three years, oil prices remained above $90 per barrel, only occasionally falling below that level after Iran threatened to close the Strait of Hormuz, a crucial oil transport route. The regular gas cost remained consistently higher than $3 per gallon until late 2014. 2008: In July, the price of oil soared to about $145/b. That sent regular gas prices to $4.11/gallon. Early in December, regular gasoline prices had fallen to $1.81 per gallon, and oil prices had fallen to about $49 per barrel.How Oil and Gas Prices Are Affected by Supply and Demand
Oil prices are impacted by supply and demand, just like most products you purchase. Prices rise when there is greater demand, such as during the summer driving season. Since only a few northern states use heating oil in the winter, there is less demand. The commodities exchange's oil futures contracts have an impact on oil prices as well. These prices change daily depending on what investors believe the future price of oil will be. Commodity traders significantly influence oil prices.How OPEC Affects Oil and Gas Prices
Thirteen oil-producing nations make up OPEC, which accounts for 36% of global crude oil production. These nations joined forces in 1960 to control the oil supply and price. 8 They became aware that they were using a finite resource. They would run out of oil faster if they were in competition with one another because the price of oil would be so low. The United States has 577.5 million barrels of oil stored in its Strategic Petroleum Reserves as of March 2022. 9 When necessary, the federal government uses it to increase supply, like when supply lines are cut off after a natural disaster. The United States declared in March 2022 that it would release 30 million barrels from the reserve to address supply issues brought on by the conflict between Russia and Ukraine. The first time OPEC exercised its power was during the oil embargo of 1973. It limited supply by cutting off oil to the United States. Prices increased, taking power away from American oil producers. When the price is low, it is too expensive to open new fields; however, if the price had been higher, other countries would have been encouraged to drill new ones. The United States also buys oil from Mexico, an OPEC non-member. As a result, America becomes less reliant on OPEC oil.Where Is the Highest Demand for Oil?
About 20% of the oil produced worldwide was consumed in 2019 by the United States. This oil is primarily used in transportation. The next two biggest consumers, China and India, used roughly 14% and 5% of the world's oil output, respectively. Japan and Russia are the next two, each with 4%.How Speculation May Impact Oil and Gas Prices
Contracts for the purchase or sale of oil at a particular price and time in the future are known as futures contracts. Based on their predictions of future prices, traders in oil futures place bids on the price of oil. To determine the price, they take a look at the anticipated supply and demand. Traders will raise the price of oil if they believe that rising global economic activity will lead to an increase in demand. Even when there is a large supply of oil available, this can lead to high oil prices. The gold price experienced what is known as an asset bubble in the summer of 2011. In 2005, it also occurred in housing. The 2008 financial crisis resulted from the 2006 housing bubble burst.Frequently Asked Questions (FAQs)
What is the current price of oil?
The Energy Information Administration's spot price report allows you to check the price of oil right now. Additionally, you can look at the oil price chart provided by the Federal Reserve.How do you make investments based on oil prices?
Investors have direct access to the price of crude oil through futures contracts. A similar product that gives stock market investors exposure to oil futures is the USO ETF. You can also make investments in stocks and energy funds to gain exposure to the overall oil market..