What Causes Gasoline Prices to Fluctuate?
Have you ever wondered who’s at the throttle of the gasoline-price rollercoaster for the past several years?
With the price of gasoline having peaked at more than $4 per gallon in some areas, then falling to less than $2, it’s hard for consumers to understand – not to mention budget for.
The factors that determine the final price of gasoline are far-reaching and global – from local politics in developing nations to a natural disaster in a neighboring state. Other elements come into play as well.
Factors that influence gasoline prices
Supply of crude oil – Most crude oil that’s refined into gasoline is produced and sold by Oil Producing Exporting Countries – or OPEC. This cartel of 12 countries in Africa, the Middle East and South America uses a loose quota system to determine how much oil to produce and sell. One of OPEC’s goals is to stabilize oil prices by eliminating unnecessary fluctuations. However, its decisions about production, pricing and distribution affect the price of international oil – and, consequently, the price of gasoline.
Worldwide demand – The demand for crude oil in China, India and other developing countries has risen with their population, increased trade, growing internal markets and strong commodity prices. In less than five years, it is estimated that developing nations will account for nearly half of the global demand for oil, up from 36 percent in 1996.
Distribution network – Anything that interrupts the flow of petroleum through the distribution network can cause gas prices to rise, such as a natural disaster like Hurricane Katrina or political instability in major oil-producing countries like Venezuela, Iraq and Nigeria.
Value of the U.S. dollar – Oil is traded on the world market is U.S. dollars. When the value of the dollar declines in comparison to other major currencies, OPEC earns less per barrel of oil. To compensate, it may raise the price per barrel, thereby increasing the price of gasoline.
The market – One of the most complicated factors that affect gas prices is the oil trading market – actually, three different markets that all can play a role in the price of gasoline.
- Contract market – The fate of most oil and gas is predetermined by contracts among oil companies, dealers, refineries and independent dealers.
- Spot market – This market fills the gaps in the contracts market by matching companies with surplus oil to those that need more. Of the three markets, the spot market is the only one where actual barrels of oil are traded. It’s also where the best deals can be found because buyers and sellers are not bound by contracts. Thus, the laws of the free market are in effect.
- Futures market – Crude oil is traded on the New York Mercantile Exchange, although contracts are rarely fulfilled. For instance, while more than 5 billion barrels of oil were reportedly traded on the futures market during a seven-year period, only 31,000 were actually delivered. Regardless, the fluctuation in the price of oil per barrel is driven by information that represents the state of the oil market. In most cases, consumer gasoline prices will mimic the trends of the futures market.
Common misconceptions about gasoline prices
Perhaps the biggest misconception about gasoline prices is that gas companies set them. However, since the companies own only about 5% of U.S. stations, their control over the price at the pump is minimal.
Another misconception is that gas stations like gas prices high. Not so. Profit margins at the pump are about 23 cents per gallon, regardless of the price per gallon. In addition, many stations are under contract to sell gas at a predetermined price, which may yield a profit of only a few cents on a dollar. And when gasoline prices increase, station owners feel the pinch because customers spend less on the store’s profitable convenience items.
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