What drives gas prices?
Look at it from
Explore this infographic to see which cost factors come into play at each step of the oil production process.
Geologists locate the crude oil, and the site is inspected and cleared for drilling. It’s then time to prepare the land, build the necessary facilities, assemble a crew and get to work.
When the crude oil is out of the ground, it’s then loaded up and delivered to refineries, distribution centers and regional stockpiles. Depending on location and infrastructure, this oil may be transported by sea, by rail or by pipeline.
Businesses that buy large amounts of crude oil come to the futures exchange to avoid the risk of fluctuating prices. They lock in a price based on all the variables affecting supply and demand.
At some point the crude oil is refined – made into gasoline, diesel fuel, jet fuel and other products. Exchanges offer futures for crude oil in all its forms, including contracts for these refined products.
The gas station has now purchased and stocked the gasoline that you’ll put into your vehicle. The final price they charge per gallon takes into account local competition, state laws and profit margin for their business.
Gas prices are complex, but they don't have to be surprising.
Cost variables start at the beginning of the production process, and only build as the oil moves along the supply chain. By understanding all the factors at play, we can be better informed when we see our gas prices going up, and down, and up, and down...
In an interconnected global marketplace, demand and supply fundamentals are quickly factored into prices for commodities like crude oil. For example, weak demand from large oil consumers like China, coupled with growing supplies, can mean decreased oil prices. Stronger demand can make prices go up.
Regulations that either restrict the production of oil or impede its flow can affect prices.
Changing Supply Landscape
Advancements in drilling technology have resulted in massive increases in domestic production of crude oil. During 2014, the U.S. reached the highest level of crude oil production since 1986 making it the third-largest oil-producing country in the world, close behind Russia and Saudi Arabia.
Ongoing conflict in the Middle East could potentially disrupt supply and cause prices to increase. Some conflicts, such as the recent clashes between Russia and Ukraine, can result in government sanctions that further restrict supplies and affect energy prices.
Rail and Pipeline Expansions
In North America, investments in pipeline expansions and increased rail capacity are making it more efficient and cost-effective to move domestic crude oil supplies to refineries on the Gulf and East coasts.
Because OPEC cartel controls a significant share of oil production, crude oil prices can fluctuate depending on where the organization sets its output levels.
Oil is priced in U.S. dollars so, when it fluctuates, it may affect the demand for dollar denominated commodities. It affects every other nation’s consumption of crude oil. A strong dollar means oil is more expensive for overseas markets, whereas a weak dollar equates to stronger overseas purchasing power.
Government policies can impact fuel prices through taxes, subsidies and surcharges, which can range from 15 percent per gallon in parts of the U.S. to 60 percent in some European countries.
Logistics and infrastructure
On the heels of the U.S. oil boom, U.S. refining inputs have increased dramatically. The U.S. is now a net exporter of refined petroleum products. Government policy allows for U.S. gasoline and other refined products to be exported, while the export of U.S. crude is restricted.
Certain types of crude oil may require more involved refining processes, and certain markets might have specific requirements for gasoline formulations. These factors, combined with a refinery’s capabilities and facilities, can impact pump prices.
State Taxes and Fees
In North America, each state has its own laws governing the purchase of gasoline for retail. Depending on where you live, these rates can cause gas prices to be higher or lower.
The gas station will use the money they make today to buy their next supply of gasoline. They set a price per gallon that will compete with other gas stations in town and will earn them a profit to keep business up and running.