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Forbes Advisor - Smart Financial Decisions Made Simple

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Smart Financial Decisions Made Simple: Money Advice, News And Product Reviews From A Name You Trust.

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High demand for crude oil and low supply pushed gas prices upward this year. And though the Federal Reserve has raised interest rates four times so far in 2022—and is planning on more raises in the near future to nudge prices down—there are other factors at play internationally.

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Veni, Vidi, Vici (I came, I saw, I conquered). These are the famous words Julius Caesar wrote to the Roman Senate after a quick victory. But, in some ways, they apply to the students from the Lasallian University Center for Education (LUCE) in Rome. As...

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Lewis University Experts Blog | Lewis University Experts Share Thoughts

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Veni, Vidi, Vici (I came, I saw, I conquered). These are the famous words Julius Caesar wrote to the Roman Senate after a quick victory. But, in some ways, they apply to the students from the Lasallian University Center for Education (LUCE) in Rome. As...

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Gas prices since 2020 have been on a rollercoaster ride. The price for a gallon of regular gas was $2.58 on January 6, 2020. It plummeted 31% to $1.77 by the end of April 2020 and then rose 24% to $2.20 a gallon on July 13, 2020, where it held steady for the remainder of the year. Through 2021, prices steadily increased, rising 46% to end the year at $3.28. By March 2022, gas prices had risen above $4.10, their highest since July 2008.

A combination of factors, including the response to the coronavirus pandemic, created this extreme volatility.

Key Takeaways

What Impacts Gas Prices?

High gas prices are created, in large part, by high crude oil prices. Oil costs account for 43% of the price of regular gasoline. The remaining 57% comes from distribution and marketing, refining, and taxes. These inputs don't change as frequently as oil prices do.

Important

When oil prices rise, you can also expect to see the price of gas eventually rise at the pump. A $10 rise in oil prices (per barrel) translates to a $0.25 increase in gas prices (per gallon) over the long term.

Gas prices and underlying oil prices are determined by three factors: supply and demand, commodities traders, and the value of the dollar.

Supply and Demand

Like most of the things you buy, supply and demand affect both gas and oil prices. When demand is greater than supply, prices rise, and vice versa. For example, the exploration of new U.S. shale oil reserves increased the oil supply in 2014, and gas prices fell, but that boom reversed when low prices put many producers out of business.

Seasonal demand also affects oil and gas prices. Normally, gas prices rise every spring. The demand for gas increases in the summer as families hit the road to go on vacation. Regulations also require a shift to summer-grade gasoline, which is more expensive to produce.

Commodities Traders

Traders of commodities, such as gasoline, wheat, and gold, also cause high gas prices. They buy oil and gasoline on the commodities futures markets. Those markets allow companies to buy contracts of gasoline for future delivery at an agreed-upon price. But most traders have no intention of taking ownership. Instead, they plan to sell the contract for a profit.

Both gas and oil prices are affected by the ups and downs in these futures contracts. The price depends on what buyers think the price of gas or oil will be in the future.

Note

In this way, commodities traders create a self-fulfilling prophecy, which leads to an asset bubble. Unfortunately, the one who pays for this bubble is you, at the gas pump.

The Value of the Dollar

Gas and oil prices also rise when the value of the U.S. dollardeclines. Oil prices rose between 2002 and 2008 because the dollar depreciated significantly during that time.

Note

Oil prices fell between late 2014 and 2016, partly for this reason. A strong dollar allowed the members of the Organization of Petroleum Exporting Countries (OPEC) to make more money while keeping supply constant.

History of Gas Prices

Here's how different situations-from conflict on the world stage to engineering mishaps-have affected the price of gasoline.

In May, fears about unrest in Libya and Egypt sent oil prices up to nearly $127 per barrel. Even after oil prices dropped, the price at the pump stayed high. Why? Commodities traders were concerned about refinery closures due to the record Mississippi River floods.

In February, concerns about potential military action against Iran -by either Israel or the U.S.-caused high oil prices. At the same time, some U.S. oil refineries were closing. Additionally, oil and gas prices tend to rise every spring, in anticipation of increased demand during the summer.

As a result, the price for a gallon of gasoline was above $3.50 by February 13, several weeks earlier than in 2011. By late March, the national average had jumped to $3.91 per gallon. The price of WTI oil exceeded $100 per barrel.

Prices were high in August as a result of Hurricane Isaac, which hit the U.S. Gulf Coast region on August 28, 2012. In anticipation of the Category 1 hurricane, refineries in the area shut down production. As a result, crude oil production lost nearly 1.3 million barrels per day, which caused the national average price of gas to increase.

Iran started making threats regarding the Strait of Hormuz in March 2013. Almost 20% of the world's oil flows through that narrow checkpoint bordering Iran and Oman.

In anticipation of such a crisis, oil traders bid up the price, which reached $118.90 per barrel on February 8. Gas prices soon followed, rising to $3.78 per gallon by February 25. Prices rose again in August as oil prices hit a 15-month high that summer. That spike was created by political unrest in Egypt.

Gas prices rose in Aprilbecause the price for WTI oil rose to $104 per barrel. New pipelines from the Cushing, Oklahoma, storage hub pushed inventories to the lowest levels since November 2009.

The price of imported Brent oil rose to $111 per barrel in May. This spike was caused by the Ukraine crisis as well as unrest in Nigeria and Iraq, two significant oil producers.

In 2015, California experienced the highest gas prices in the country for the first time, with an average annual price of $3.16. Midwest refinery problems sent California's oil elsewhere. Since it doesn't have major pipelines from other regions, California had to wait for tankers with imported oil to arrive.

Gas prices rose when OPEC cut production in November. Members agreed to reduce supply by 1.2 million barrels per day in January 2017. In response, traders bid up oil prices in December 2016.

Gas prices rose for 14 consecutive days after the OPEC meeting. The national average of $2.23 per gallon was up 20 cents, compared to the same time period the previous year.

On August 25, Hurricane Harvey hit Texas, wiping out 5% of the nation's oil and gas production. Gas prices rose from $2.37 per gallon to $2.68 per gallon in a matter of weeks. By September, the U.S. Department of Energy had released 5.2 million barrels of oil from the Strategic Petroleum Reserve.

In November, OPEC agreed to keep production cuts through 2018. At a meeting of OPEC and non-OPEC oil-producing nations in December 2018, they again cut production.

Thanks to increased shale oil drilling, the U.S. became the world's largest oil producer.

In May, global oil prices reached $80 per barrel following the U.S. decision to pull out of the Iran nuclear agreement and reinstate sanctions. Production in Iran dropped from 3.84 million barrels per day (Mbpd) in January to 2.6 Mbpd in December 2018. In addition, Venezuela faced limited production. Gas prices reached $2.90 per gallon in October.

Oil prices entered a bear market in 2019. The price of WTI oil peaked at $66.24 per barrel on April 23, 2019. It fell to $52.41 on October 3, 2019. One reason was that U.S. oil production had increasedto a record of 12.8 Mbpd by late 2019. It was also the first time since at least 1948 that the U.S. exported more oil than it imported.

In January 2020, governments began shutting down travel and businesses to stem the COVID-19 pandemic. By April, much of the world's population had been told to stay at home. Demand for oil fell by 5,600 barrels per day in the first quarter of 2020.

A drop in demand was worsened by a supply glut. On March 6, Russia announced that it would increase production to offset falling prices. To remain competitive, OPEC also increased production. As oil-storage facilities filled up, oil and gas prices plummeted.

On April 12, 2020, OPEC and Russia agreed to lower output in order to support prices. It wasn't enough, however. By April 20, 2020, the price for a barrel of oil had fallen below zero to about negative $37. Traders were willing to pay someone else to take delivery of the oil, since they couldn't store it.

In early 2021, the rollout of vaccines and a decrease in lifestyle restrictions drove up demand for gas as more people began to resume pre-pandemic activities. Oil production remained depressed throughout the year, exacerbating the upward pressure on oil and gas prices. By mid-May, the price of gas surpassed $3 a gallon for the first time since 2014.

In the second half of the year, inflation increased at its highest rate in decades under the pressure of supply chain constraints like labor shortages. Gas closed out the year at $3.28.

Gas prices jumped even higher in early 2022 on the news Russia, one of the world's biggest oil producers and exporters, was amassing troops along its border with Ukraine. Despite attempts at diplomacy, the oil market's fears were confirmed when Russia invaded on Feb. 24. The invasion prompted the U.S. and its allies to impose tough economic sanctions on Russia, including a U.S. ban on Russian oil imports. Subsequently, gas prices jumped to decade highs, surpassing $4 nationally and topping $5.69 in California.

Factors That Force High Gas Prices To Drop

The April-to-September vacation-driving season often causes an increase in gas prices. Prices tend to fall in the winter because transportation needs and production costs are lower. This price decrease even offsets an increase in home heating oil usage for winter in northern areas of the U.S.

Gas prices usually drop when supply increases. There are a lot of ways that could happen; for example, OPEC could decide to release more oil, or shale oil producers could find another large deposit or adopt new technology.

Note

Most important is the impact that all of these factors have on commodities traders. If they believe that oil and gas prices will fall, they won't bid up futures contracts. They may even find another investment, which would allow prices to decline further.

How Can We Reduce Gas Prices?

The most immediate thing we can do is to reduce our usage of gas by driving less or increasing fuel efficiency. One easy way to improve fuel efficiency is to keep tires inflated. Keeping the engine properly tuned can improve a car's gas mileage by 4%. Urban dwellers can use public transit. Others can move closer to work in order to reduce commuting time.

For the long term, we can change our need for oil and gas by switching to alternative-fuel vehicles.

Could these actions reduce the high price of gas? Maybe, if they are sustained over a long period of time.

Important

Frequently Asked Questions (FAQs)

Who controls gas prices?

What state has the highest gas prices?

How do gas prices affect the U.S. economy?

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The Price of Gas: Why It Goes Up and Down

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Gas prices since 2020 have been on a rollercoaster ride. The price for a gallon of regular gas was $2.58 on January 6, 2020. It plummeted 31% to $1.77 by the end of April 2020 and then rose 24% to $2.20 a gallon on July 13, 2020, where it held steady for the remainder of the year.

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What time of year is gas the cheapest? How does Supply and Demand play a role in prices being so low during this time?

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What time of year is gas the cheapest? How does Supply and Demand play a role in prices being so low during this time?

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Gas prices are traditionally lower during the first week of February. Demand affects the price because during this period of time the Demand for gasoline is usually at its lowest, and the Supply is expected to increase due to the lower demand

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How have shortages/surpluses of this resource impacted the price of gasoline (i.e. what is going on in the world causing shortages/surpluses of this resource)?

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How have shortages/surpluses of this resource impacted the price of gasoline (i.e. what is going on in the world causing shortages/surpluses of this resource)?

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If prices are too high then the supplier has a surplus and reduces prices, and if prices are too low then shortages force the prices to raise up.The result when there is no market monopoly power or government intervention is an equilibrium price where supply and demand are equal.

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How does Supply and Demand play a role in prices being so low during this time?

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How does Supply and Demand play a role in prices being so low during this time?

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The way supply and demand have such a big role in this is because people everyday drive cars and other vehicles that use gasoline as fuel, so the demand for it is very high. We need to have a big supply of gasoline/petrol because so many people use it today.

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What is the main resource used to produce gasoline for our cars?

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What is the main resource used to produce gasoline for our cars?

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Gasoline is made when oil is made into various products by a process of fractional distillation.