Why Do Gas Prices Fluctuate?

Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local retail station competition. Additionally, gasoline prices can change rapidly due to crude oil supply disruptions stemming from world events, or domestic problems such as refinery or pipeline outages.

Seasonality in the demand for gasoline - When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer, when people drive more, and fall in the winter. Good weather and vacations cause U.S. summer gasoline demand to average about 5% higher than during the rest of the year. If crude oil prices remain unchanged, gasoline prices would typically increase by 10-20 cents from January to the summer.

Changes in the cost of crude oil - Events in crude oil markets were a major factor in all but one of the five run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council’s study, U.S. Petroleum Supply - Inventory Dynamics.

About 47 barrels of gasoline are produced from every 100 barrels of crude oil processed at U. S. refineries, with other refi ned products making up the remainder.

Crude oil prices are determined by worldwide supply and demand, with signifi cant infl uence by the Organization of Petroleum Exporting Countries (OPEC). Since it was organized in 1960, OPEC has tried to keep world oil prices at its target level by setting an upper production limit on its members. OPEC has the potential to infl uence oil prices worldwide because its members possess such a great portion of the world’s oil supply, accounting for about 40% of the world’s production of crude oil and holding more than two-thirds of the world’s estimated crude oil reserves. Additionally, increased demand for gasoline and other refi ned products in the U.S. and the rest of the world is also exerting upward pressure on crude oil prices.

Rapid gasoline price increases have occurred in response to crude oil shortages caused by, for example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf confl ict in 1990. Gasoline price increases in recent years have been due in part to OPEC crude oil production cuts, turmoil in key oil producing countries, and problems with petroleum infrastructure (e.g., refi neries and pipelines) within the United States. Additionally, increased demand for gasoline and other petroleum products in the U. S. and the rest of the world is also exerting upward pressure on prices.

Product supply/demand imbalances - If demand rises quickly or supply declines unexpectedly due to refi nery production problems or lagging imports, gasoline inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers become concerned that supplies may not be adequate over the short term and bid higher for available product. Such imbalances have occurred when a region has changed from one fuel type to another (e.g., to cleaner-burning gasoline) as refi ners and marketers adjust to the new product.

Gasoline may be less expensive in one summer when supplies are plentiful vs another summer when they are not. These are normal price fluctuations, experienced in all commodity markets.

However, prices of basic energy (gasoline, electricity, natural gas, heating oil) are generally more volatile than prices of other commodities. One reason is that consumers are limited in their ability to substitute between fuels when the price for gasoline, for example, fl uctuates. So, while consumers can substitute readily have that option in fueling their vehicles.