Why Do Gas Prices Fluctuate?

If you own a car, you’ve probably noticed that gas prices change from day to day. They can rise or fall a penny or two per gallon, or as much as 30 cents overnight. This change in gas prices is a source of concern for many drivers. It’s impossible to predict, hard to budget for and annoying to deal with. So why is it that gas prices fluctuate so wildly?

Distribution of Costs

When you pay for gas, the money is broken up and distributed among several organizations involved in the supply chain. This includes everything from the gas station to the refinery to the US Government. The cost mainly breaks down into four segments. For example, out of $1, here is how the money is distributed:

  • 12 cents go to taxes
  • 12 cents go to the refinery that produced the gasoline
  • 11 cents is distributed to those who ship, market and handle the gas
  • 66 cents (the majority) goes to cover the cost of the crude oil

OPEC and Crude Oil

The cost of crude oil is determined largely by OPEC, the Organization of the Petroleum Exporting Countries. OPEC currently has twelve member countries. These are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Crude oil is generally judged as either light or heavy, and as either sweet or sour – which has nothing to do with flavor – as ways to judge how easily it can be refined into gasoline and other products. Light, sweet crude is the easiest to refine, and most refineries are set up to process it. Unfortunately, it is also growing increasingly rare. Heavy, sour crude is much more abundant, but most refineries can’t handle it without expensive reconfiguration.

The price of a barrel of crude oil is determined by several factors. As OPEC produces more oil, the prices for each individual barrel go down. The quality of the oil affects refinery costs, which can increase the price of gas.

Demand and Distribution

Worldwide demand for gasoline is going up. It will not stop rising until an alternative energy source is found and made commercially viable for developing nations. As it stands, gasoline is an astonishingly powerful source of energy. Solar fields, wind farms and other green energy sources cannot compete with the power output of a gallon of gasoline. On the other end, nuclear power can, but is expensive to produce and maintain — not to mention dangerous and highly regulated.

As countries expand their infrastructures, more and more gasoline is required. India, China and other developing nations will continue to demand more gasoline until the price of a gallon becomes prohibitive.

At the same time, getting this gasoline to these locations around the world is an incredible challenge. Only a small handful of countries produce enough oil to export it, and it has to be shipped around the world. Shipping companies need to be paid, the workers need to be trained and it needs to successfully make the journey. Anything that affects the supply lines will affect the cost of gasoline.

  • Pipelines can break, like the BP disaster in the Gulf of Mexico
  • Ships can sink, such as the Exxon Valdez
  • Weather systems can interrupt shipping, as well as ruin distribution networks or gasoline storehouses – think Hurricane Katrina
  • Political instability among OPEC nations, or war that interrupts supply lines, also has an effect

Trading on the Mercantile Exchange

Even though oil is produced primarily in non-US countries and it is consumed worldwide, oil is largely traded on the world market using US Dollars as currency. This means the fluctuation in the value of the US Dollar affects the price of gas. When the USD declines in value, it takes more dollars to purchase the same amount of oil — meaning a general price increase per barrel.

Oil is traded on three main markets. The first is the contract market. The majority of the oil that is traded ends up here — companies, dealers, refineries and other groups trade and buy barrels of oil, fulfilling contracts and delivering product.

Spot markets work to fill the gaps. Some companies need more oil than they have delivered to them on contract, and other companies have more oil than they need. The spot market matches these two groups up and evens out the supply and demand for oil. These trades are not bound by contract, which means companies can make excellent deals on their purchases or sales.

The futures market is the most complex system of oil trading and is largely a form of speculation. Huge numbers of barrels are traded on the futures market, but very few of them are ever delivered. During one particular seven-year period, over five million barrels were traded, but only 31,000 were ever delivered as a result of the deals. Despite the low volume of actual deliveries, the futures market is driven by the fluctuation in every factor that influences the price of gas, meaning it is a good indicator of how gas prices fluctuate.

Unrelated Factors Why Gas Prices Fluctuate

Many people like to blame US Presidential elections for altering the price of gas. In reality, the president has virtually no effect on gas prices. Likewise, actual gas stations have very little to do with the change in gas prices. Only about five percent of the gas stations in the US are owned and operated by oil companies, meaning they have a relatively marginal effect on the price of gas at the pump.

Individual gas stations often have contracts to sell gas at certain prices, which limits the amount of profit they can gain from a given shipment of gas. As businesses, they want to strike a balance between the cost of buying gas and the price they sell it, but they can’t simply charge too much. If they tried, other stations could under-cut them and the loss in volume would negate their profits.

20 thoughts on “Why Do Gas Prices Fluctuate?

  1. I always feel like there’s a board of directors at these oil companies just plotting to take advantage of people just when they need the gas most. Monday morning drives to work, friday drives to a vacation spot in the summer and any holiday when they know people will be traveling.

    • I agree on all counts. Gas prices go up when we need gas the most. It feels very exploitative, like selling bottled water at extravagant prices in a disaster zone where safe drinking water is scarce.

      It is hard not to feel like we are at their mercy. Unfortunately we can’t just go buy a year’s worth of gasoline on a day when it’s relatively cheap and store it. Or at least the average person generally can’t. So they know we will have to buy or we will have to sit at home with a useless vehicle in the driveway.

    • Heh, I want to believe that too, but I think what would account for the fluctuations more so is that the supply skyrockets during those periods. Of course, when demand increases, supply inexorably falls and drives the price up.

      That being said, you would imagine that gas companies would have the foresight to stock up for these known high-demand periods, but then why would they shoot themselves in the foot and turn away good profits, right?

    • I totally agree with you on that one. I live in Michigan and our Governor wants to raise our gas taxes to 19 cents per gallon plus we have the second most expensive gas prices in the country. Ridiculous.

      I find that gas is the “cheapest” in my area on Tuesday mornings so that’s when I try to fill up.

      Isn’t it sad that I remember filling up my car in high school for $10?? These days I’m filling for around $70 unless I’m purchasing from Costo….

  2. @Ken Savage you’re completely right. There’s a reason why companies like Exxon are the biggest in the world. They need to make money and people are willing to pay more for gas when they need it most. There are probably entire groups dedicated to when they can make the gas prices higher and when they should make them lower. You are running a company not a charity.

  3. The thing that drives me crazy about gas prices is that when there is a huge price difference between coast or where it is more closely shipped to (Los Angeles for example) which is very high, and then head inland where it would have to be driven a couple of hundred miles and it is cheaper (between Los Angeles and Las Vegas it is sometimes quite a bit less!). I get the supply and demand, but otherwise makes little sense.

  4. Gas prices are one of the biggest reason I choose cycling. I never have to worry about a price fluctuating and causing me hassle. I also burn fat rather than fuel, and get a good amount of fresh air.

    I hate how gas companies know we need gas, so they can choose what they charge for it at any time. If they put it up incredibly high, people would still purchase it as they need it.

  5. I didn’t realize that so much of the price of gas is in taxes (12%). The control that OPEC has on world gas prices is kind of scary as well. They can just raise or lower prices on crude oil, the main cost of gas, whenever they want. I wonder if there’s going to be any regulation on OPEC at all in the future.

  6. One of the absurd things I’ve heard about are the people who will drive out of their way for a significant distance to save a few cents at the pump. Often times these people don’t realize that to spend the time and not to mention mileage to get there, they burn up their savings to do so. Beyond that, less drastic adjustments to other portions of their life (eating in vs out) will bring in substantially more savings!

  7. Completely agree with you. These people just take advantage of the people when they know that gas is needed the most. They know that they have complete monopoly and can do anything they wish to.

    It’s sad but there is also very less that can be done to stop this.

    • To an extent they will alter prices to reflect demand, but I think that the oil industry is regulated enough that they wouldn’t be abusing it in the fashion of a monopoly. Think about it this way, if they are truly that corrupt and hold that much of a monopoly on the industry, why is it that gas prices ever go DOWN?

      I dislike paying as much as we do for gas, but I think there’s more to the picture than simple greed from the companies. Things ranging from global events, political instability and even disasters play a part.

  8. Hey Ken! Great article! I loved how well you explained the factors that play a big role in the rise of gas prices. I thought it was all about inflation; I never thought there were so many factors involved. But… is it like this everywhere? In my country the price of gas keeps on rising! It doesn’t fluctuate at all… it just keeps going up, but never going down at all!

  9. My pa has always blamed local politics for gas price fluctuations. I’ve explained that although there might be something to that, the reasons can be more from outside our country. Thanks for the more indepth explanation!

  10. I go for greed with window dressing on it. An entire economy based on greed. There is even arbitrage going on for gas that is in service stations tanks.
    All these folk know that oil will be consumed. Like the stock market, people are making money on the fluctuations that go along with it.

    • I have to agree with you on that the greed is basically making the oil prices go up. They know that it’s impossible to live without oil right now without a source of alternative energy. So OPEC or Oil companies could raise the prices up and there will still be a customer for it.

      • You make a great point. They think they have us by the cars. Lots of times they do.
        But people respond by driving less and thus decreasing demand. And if the stockpiles are full (as I recall they are right now) prices will drop

  11. Excellent Article. We call Gas Petrol here in India, when someone says Gas we don’t usually visualize something liquid!

    Prices have been continuously rising here in India, I know it used to be 30 Rupees per litre a few years back, it is now 75.

    A great point you make is the effect of USD on the prices. Whenever Rupee falls in comparison to Dollar (currently $1= 63.25 Rupees), everyone begins to expect an increase in Petrol Prices.

  12. Pretty interesting to see why these gas prices are high or low. I’ve always thought that the gas stations were allowed to just change the prices to whatever they want and let people come buy it depending if they’re desperate enough. Did not know that it was split up. Thanks for the great read.

  13. Yeah this is a really interesting post and I agree, it’s always funny how when people tend to do the most traveling is when gas prices are at their peak. That’s why I’m always on the lookout for the cheapest gas in my town, even if it happens to be a few miles away.

  14. The prices just seem to be going up and up. The problem unfortunately is that the government here in the UK persistently refuses to drop the taxes on its fuel meaning that the hard pressed motorist is unable to escape ever increasing costs. Once they go up they rarely go down!

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