The Past and Current Factors Influencing Gas Prices
Since 2020, gasoline prices have been on an unpredictable roller coaster ride. On January 6 January 6, 2020, a gallon of standard gasoline cost was $2.58 per unit. It dropped by 31 percent to $1.77 per gallon by the end of April 2020 and then rose by 24 percent to $2.20 per gallon on July 13, 2020, where it remained stable for the year. Prices continued to climb gradually through 2021, ultimately reaching $3.28 (a 46 percent increase) at the end of the year. By March 2022, the gas gallon price had surpassed $4.10, marking a new high since July 2008. Several circumstances brought about this extremely volatile market condition, one of which was the response to the coronavirus epidemic.Key Takeaways
- Since the cost of oil accounts for 43 percent of the cost of gasoline, the price increases whenever the price of crude oil also does.
- Oil and gas prices are influenced by various factors, including seasonal demand, speculative activity in the commodities market, and the value of the United States dollar.
- Fuel efficiency, alternative fuels, and public transit might be prioritized by consumers and governments alike, which could eventually have the effect of bringing down the price of gasoline.
What Factors Influence the Cost of Gas?
The high price of crude oil is a significant contributor to the high price of gasoline. The price of ordinary gasoline is determined mainly by oil, which accounts for 43% of the total cost. The remaining 57 percent comprises revenue obtained through refining, distribution and marketing, and taxes. The cost of these inputs does not fluctuate nearly as frequently as oil. The prices of other oil grades are compared to the prices of two oil grades. The price of oil measured in West Texas Intermediate (WTI) is considered the standard in the United States. The price of oil sourced from the Brent region of the North Sea is considered the industry standard. 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 the course of a year, a change of $10 in the price of oil (per barrel) will result in a $0.25 increase in the price of gasoline (per gallon). The supply and demand for gasoline, as well as the actions of commodities traders and the dollar's value, are the primary drivers of price movements in the underlying commodity, oil.Both the Supply and the Demand
Supply and demand affect gas and oil prices, just like the cost of most other commodities you can buy. 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 the supply of oil, which resulted in a decrease in the price of gasoline. However, this boom was reversed when low prices caused many companies to go out of business. Other factors, including seasonal demand, are also affected by oil and gas prices. The cost of gasoline typically goes up during the springtime. Because more people are traveling by car during the warm summer months, there is a higher demand for gasoline. In addition, the regulations mandate a switch to summer-grade gasoline, which results in an increase in production costs.Traders in Various Goods
The high cost of gasoline is also contributed to by those who trade in commodities such as wheat and gold as well as gasoline. On the commodity futures markets, they make their purchases of oil and gasoline. Companies are able to buy contracts of gasoline for future delivery at a price that has been previously agreed upon, thanks to these marketplaces. However, the vast majority of traders have no intention of ever becoming owners. They intend, instead, to make a profit by selling the contract to a third party. The fluctuations in the value of these futures contracts affect the pricing of gasoline and oil. The pricing is dependent on the customers' expectations of the price of gasoline or oil in the following years. When traders anticipate that the price of gasoline or oil will be high, they frequently bid the prices up even further. Typically, this takes place in the spring, when market participants begin purchasing oil futures contracts in preparation for the subsequent price increase in the summer. The trading of commodities in this manner results in the formation of a self-fulfilling prophecy, which in turn causes an asset bubble. Unfortunately, you will be the one paying for this bubble when you fill up your petrol tank.The Current Worth of One United States Dollar
When the value of the United States dollar falls, prices for gasoline and oil also tend to climb. Because of the massive decline in the dollar value during that period, oil prices increased between 2002 and 2008. The monetary unit of account for all oil contracts is the United States dollar. This was a contributing factor in the decline in oil prices that occurred between late 2014 and 2016. The members of the Organization of Petroleum Exporting Countries (OPEC) were able to increase their profits while maintaining the same level of supply because of the strength of the dollar.A Look Back at the Price of Gas
The cost of gasoline has been impacted in a variety of ways, ranging from wars fought in the international arena to accidents caused by human error in the manufacturing process.2011
Concerns over turmoil in Libya and Egypt drove up the price of a barrel of oil to nearly $127 in the month of May. Even after the price of oil fell, the price of gasoline did not decrease at the pump. Why? Because of the historic flooding along the Mississippi River, commodity merchants were anxious that refineries would have to close.2012
In February, rising oil prices were triggered by worries about the possibility of military action against Iran being taken by either Israel or the United States. At the same time, a considerable number of oil refineries in the United States were shutting down. In addition, the cost of gasoline and oil tends to go up throughout the springtime of each year in preparation for the higher demand that occurs during the summer. As a direct consequence, the price of a gallon of gasoline crossed the $3.50 threshold on February 13 of this year, several weeks earlier than it did in 2011. By the end of March, the national average price for a gallon of gas had increased to $3.91. The rate of a barrel of West Texas Intermediate oil surpassed $100. As a direct consequence of Hurricane Isaac's devastating strike along the Gulf Coast of the United States on August 28, 2012, prices reached all-time highs for the month of August. Refineries in the vicinity stopped output in preparation for the Category 1 hurricane that was headed their way. As a direct consequence of this, the daily production of crude oil dropped by close to 1.3 million barrels, which led to an increase in the national average price of gasoline.2013
In March 2013, Iran first started making threats regarding the Strait of Hormuz. This slender checkpoint on the border between Iran and Oman sees the passage of about 20 percent of the world's oil. Oil merchants, anticipating the possibility of such a crisis, drove up prices, which hit a high of $118.90 per barrel on February 8. The price of gasoline followed suit shortly thereafter, climbing to $3.78 per gallon by February 25. As oil prices reached a 15-month high that summer, prices continued to climb throughout the month of August. The political instability in Egypt was the driving force behind that surge.2014
The price of a barrel of West Texas Intermediate (WTI) oil reached $104 in April, which increased the cost of gasoline. The newly constructed pipelines leaving the storage hub at Cushing, Oklahoma, brought inventory levels to their lowest point since November of 2009. During the month of May, the price of imported Brent oil reached $111 a barrel. This increase can be attributed to Ukraine's conflict and upheaval in Nigeria and Iraq, both big oil producers.2015
With an average annual price of $3.16 per gallon, California became the first state in the country to experience the highest gas prices in the country in the year 2015. Due to issues at refineries in the Midwest, California's oil was diverted elsewhere. Because it lacks large pipelines connecting it to other regions, California was forced to wait for tankers carrying imported oil to arrive at its ports.2016
As a result of OPEC's decision to reduce production in November, gas prices increased. The members reached an agreement to cut production by 1.2 million barrels per day beginning in January of 2017. In reaction, market participants drove up the price of oil in December of 2016. Following the OPEC meeting, there was a 14-day stretch during which gas prices went up. Compared to the same time around the previous year, the national average price of $2.23 per gallon represented an increase of 20 cents.2017
On August 25, Hurricane Harvey made landfall in Texas, causing a loss of oil and gas production that equaled 5% of the nation's total. Within a few short weeks, the gas gallon price increased to $2.68 from its previous level of $2.37. The United States Department of Energy had depleted the Strategic Petroleum Reserve by the end of September, releasing a total of 5.2 million barrels of oil. OPEC reached an agreement in November to maintain output reductions through 2018. In December of 2018, OPEC and other oil-producing nations met for a meeting where they once again agreed to reduce production.2018
The United States is the world's top oil producer as a direct result of increased drilling in shale oil deposits. As a result of the United States' decision to withdraw from the Iran nuclear agreement and reimpose sanctions, the price of a barrel of oil on the worldwide market hit $80 in May. Iran's production fell from 3.84 million barrels per day (Mbpd) in January to 2.6 Mbpd in December of last year. In addition, Venezuela's production was severely constrained. In October, the price of a gallon of gasoline reached $2.90.2019
2019 marked the beginning of a bear market for oil prices. On April 23, 2019, the price of a barrel of WTI oil reached its all-time high of $66.24 per unit. On October 3, 2019, it reached a low of $52.41. One of the reasons for this was that by the end of 2019, oil production in the United States had reached a record high of 12.8 million barrels per day. Additionally, it was the first time since 1948 that the United States exported a greater quantity of oil than it had imported.2020
In January 2020, governments around the world started restricting travel and commercial activities in an effort to put an end to the COVID-19 epidemic. By the month of April, the majority of the people on the planet were ordered to remain in their homes. In the first three months of 2020, there was a decrease of 5,600 barrels per day in the demand for oil. The cost of oil and gas fell precipitously as storage facilities for the commodity filled up. An excess in supplies made an already existing reduction in demand much worse. In order to maintain its position in the market, OPEC upped its production. Russia announced on March 6 that it would raise output to compensate for declining prices. In order to keep prices stable, OPEC and Russia reached an agreement on April 12, 2020, to reduce production. Despite this, it was not sufficient. By April 20 in the year 2020, the price of a barrel of oil had dropped below zero, reaching a low of approximately negative $37. Since the traders did not have the capacity to store the oil, they were willing to pay someone else to accept delivery of it.2021
At the beginning of 2021, the distribution of vaccines and less stringent enforcement of lifestyle restrictions increased the demand for gasoline as more people began to return to their pre-pandemic routines. The downward trend in oil production continued throughout the year, which contributed to the continued ascent in the price of oil and gas. Midway through the month of May, the price of a gallon of gas reached $3 for the first time since 2014. Under the impact of supply chain restrictions such as labor shortages, inflation climbed at a rate that was the greatest it had been in decades during the second half of the current year. The price of gas at the end of the year was $3.28.2022
The announcement that Russia, one of the world's largest oil producers and exporters, was mobilizing soldiers along its border with Ukraine caused the price of gasoline to spike even further at the beginning of 2022. When Russia invaded on February 24, those suspicions that the oil market had were confirmed, notwithstanding the attempts at diplomacy that were made. The invasion spurred the United States and its allies to impose severe economic penalties on Russia. One of these restrictions was a prohibition on the importation of Russian oil into the United States. After that, the price of gasoline skyrocketed to 10-year highs, passing $4 per gallon nationally and approaching $5.69 per gallon in California.Reasons behind the sharp decline in gas prices in the recent past
An increase in demand for gasoline between the months of April through September typically results in a corresponding rise in gas prices. Prices tend to drop during the winter months since there is less transportation demand and lower production costs. This price fall even cancels out an anticipated increase in demand for home heating oil in northern regions of the United States during the winter months. When there is an increase in supply, prices for gas often go down. There is a wide variety of methods in which this could take place; for instance, OPEC could make the decision to release additional oil, or producers of shale oil could discover another significant deposit or adopt new technologies. When the dollar value goes up, prices also tend to go down. Since they will still make a profit even with a stronger dollar, OPEC can afford to let supplies grow even further. The influence of these factors on commodity traders is the most crucial aspect to consider. They will not increase the price of future contracts if they have the expectation that prices for oil and gas will go down. They might even locate another investment opportunity, which would result in more price reductions.How Can We Bring Down the Price of Gas?
The most important step we can take right now is to cut down on the amount of petrol we use by either 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 efficiency when it comes to using fuel. Keeping the engine in a car adequately tuned can result in a 4 percent improvement in the vehicle's overall gas mileage. People who live in cities have access to public transportation. Others may choose to relocate to cut down on time spent traveling to and from work. By converting to vehicles that run on alternative fuels, we can reduce our dependence on fossil fuels like oil and gas over the long term. Would these actions have an effect on the current high cost of gas? Perhaps, but only if they are maintained for a considerable amount of time. The most effective strategy for consumers to use in the fight against rising gas costs is to lessen their use of fossil fuels over an extended period of time.Frequently Asked Questions (FAQs)
Who has sway over the price of gas?
Although many politicians would like to take credit for lowering gas costs — and blame their opponents for increasing prices — the reality is that the majority of the influence on gas prices comes from market forces. Gas prices can be affected by legislation and policy, but the prices themselves are not within the control of any one person or organization.Where can you find the most expensive gas prices?
The average fuel cost in California, Hawaii, and Nevada is typically the highest in the United States, while the cost of fuel in southern states like Texas, Oklahoma, and Arkansas is typically the lowest.How does the price of gas impact the economy of the United States?
The cost of gasoline can have a considerable effect on the overall economy. This can have an effect on demand throughout the economy because when customers spend more or less on fuel, they have more or less money available to spend on other goods and services. In addition, the price of a gallon of petrol is determined by the cost of a barrel of crude oil, and shifts in the cost of crude oil can have an impact on overall inflation. Recessions are frequently preceded by rises in the price of crude oil.