How to Sound Less Stupid When You Talk About Gas Prices
For something that affects so many Americans, we don’t seem to understand how gas prices actually work. Bizarre conspiracy theories and free-floating anger flourish in small talk, blaming everyone from the president to greedy oil executives to consumers themselves. It must be someone’s fault.
But despite the “I did it” stickers on your local gas stations , the price of gas is not determined by the president, a shady cabal of ultra-capitalist price-setters, China, or reverse vampires. Almost all of this is a function of supply and demand, a force more powerful than the Illuminati and the presidential administration combined.
What determines the price of a gallon of gasoline?
The price you pay for gasoline is largely determined by the price of crude oil. According to the American Petroleum Institute, about 60% of the price of a gallon of gas comes from the price of crude oil. (The other 40% is a mixture of refining costs [18%], federal and state taxes [12%], and distribution and marketing costs.) When it comes to gas price fluctuations , crude oil prices explain more. more than 90% variation over the last two years. So gas is expensive or cheap because crude oil is expensive or cheap.
Okay, then what affects the price of crude oil?
While there are other, smaller factors that determine the price of crude oil, by far the main driver of its price is supply and demand—prices are determined by the availability of the product and the willingness of people to buy it. That’s why 1956 Fender Stratocasters are $22,000 and Gary Basswood is under $90 .
So why has the price of gasoline risen so sharply?
Back in 2020, when COVID first broke out, demand for oil fell rapidly because many people around the world stopped commuting and traveling. Oil was plentiful and demand was low, so oil and gas prices fell—sometimes below zero dollars a barrel. In response to the lack of demand, oil producers quickly cut production because they did not want to sell oil at such low prices.
As “normal life” returned and people started traveling and commuting again, the demand for oil increased. U.S. oil demand has risen to pre-pandemic levels in 2022 because demand is growing fast, but creating more gasoline takes longer than just wishing for more gasoline. Some of this is practical—restarting wells and refineries takes time—but some is not. Oil companies and oil-producing countries take a strategic approach to how much crude to produce because too much oil pushes the price down and no one wants to be stuck selling cheap oil if the price drops too low.
Then there was a war between Russia and Ukraine. Russia, the world’s largest oil-producing country, has come under US and EU sanctions, further curtailing global oil supplies. All this has led to our current situation: low supply, high demand, high gas station prices.
Why is the gas price going down now?
The price is falling from its monumental high in June for several reasons. First, oil suppliers and refiners restarted their wells and increased processing a few months ago, and now this oil is starting to flow into supply depots. Secondly, due to global inflation (partly caused by oil prices), money costs less, so everything is more expensive. Third, because the markets foresee an economic downturn on the horizon.
While the price of gas is ultimately driven by supply and demand, it is also driven by future crude oil price projections, and the gas futures market has been steadily falling since its June 8 peak . This is largely due to recession fears – demand for oil and gas could fall if the economy as a whole is in a recession, so futures are worth less because no one wants to be caught storing oil if it can only be sold cheaply. . Consumer gas prices are about three days behind the futures market.
What can the government do about the price of gasoline?
While we tend to blame high gas prices on the actions (or inactions) of the federal government ( about 64 percent of Americans believe the president has any control over gas prices ), the reality is that the president can’t do anything about it. to do. directly control gasoline prices in the short term. The president does not have a “cut prices” button on his desk — he (and everyone else) is largely dependent on supply and demand.
The president may (and has already) freed oil from America’s strategic oil reserves , urged oil producers and refiners to boost production and stop being so greedy, and proposed a three-month “holiday” on the gas tax . But the price of gas didn’t really start to fall until supply increased and the futures markets started to fall. Similarly, gas was very cheap at the end of the Trump administration because demand dropped suddenly because of the pandemic, not because the government did or didn’t do anything.
Oil companies are greedy, that’s for sure, but there is no sign that they are any more greedy than they were 10 years ago. It’s easy (and fun) to point your finger at the head of Exxon and say, “Just lower your prices, asshole.” But an imaginary Exxon CEO choosing to give away free gasoline just as a courtesy would be violating laws designed to protect shareholders. Corporations have a legal obligation to be profitable (or “greedy” if you want to look at it that way).
How much will gas prices fall?
No one can say how long gas prices will continue to fall, or how far they will fall. A lot of factors can affect both supply and demand — hurricanes can destroy refineries, Thanos can destroy half the world and instantly cut demand by 50% — but as Patrick De Haan, head of oil analysis at GasBuddy notes: or surprises, gasoline prices are likely to fall 1 or 2 cents a gallon each day for the next two or three weeks, bringing the average cost per gallon to about $4.25 per gallon by mid-August.