Several factors influence the rise and fall of prices at the gas pump, including federal taxes, refinery costs, and the cost of distribution. However, the number one factor that determines the price of gasoline is the price of crude oil. In fact, the price of oil accounts for more than 70 percent of the cost of a gallon of gas. Thus, to understand and predict gas prices, it’s necessary to be aware of the factors that affect the price of oil.
While the relationship between oil prices and gas prices is strong, the two do not move in lockstep. Oil prices tend to fluctuate more widely, meaning prices go both higher and lower than the price of gas. In addition, it takes about six weeks for a change in the price of oil to show up at the gas pump. The following are two examples that demonstrate the relationship between the two. In 2008, the price of oil peaked at more than $143 a barrel. In that same year, gasoline prices passed $4 a gallon. In 2016, oil prices fell to $26 a barrel, sending gas prices below $2 a gallon.
Oil prices are mainly determined by supply and demand, and OPEC has a great deal of control over supply. Recently the OPEC nations, along with several other major oil-producing countries, agreed to cut production in order to decrease supply and drive prices up. When prices go up, oil companies are able to invest more into development and open new wells. The U.S. and other countries maintain stores of oil in case of a need to increase the supply. Demand also affects oil prices, and industrial development in Asia is currently increasing demand for oil.
Another factor that influences the price of oil is trading in oil futures. When investors agree to buy oil at a certain price at a certain date in the future, they are dealing in futures. When investors bet that the price of oil is going up and buy futures contracts accordingly, the price of oil sometimes follows their predictions even if the supply is high. To learn more about the variety of factors that influence the price of oil and gasoline, read my blog comment.