Driving can be expensive. Between buying or leasing the car itself, maintenance, and insurance, it can be enough to make some consider the bus. Choosing your insurance wisely can help that a lot, and you can always practice safe driving and precautionary measures that minimize maintenance costs, but some expenses, such as gas, are harder to control. Gas prices fluctuate regularly, and where and when they dip and rise is completely out of your hands. You can elect to buy a more fuel-efficient model to save yourself some trips to the gas station, or even take steps to save money on gas, however, the prices themselves are beyond your control.
But what causes gas prices to go up? And why are gas prices rising in 2021? There are several factors that can cause prices to fluctuate, from market conditions to governmental factors like taxes, and most of the time they’re all in play simultaneously, tugging the price up and down. But let’s get into the specifics of what each is and how they affect prices.
1. Supply and demand for crude oil
Every entry-level economics class teaches supply and demand for a reason – it impacts everything that is bought and sold anywhere. We might not commonly think of a necessity like fuel as being controlled by demand in the same way a consumer good like cashmere is, but the basic principles are the same. Supply and demand is a large part of why gas prices are higher in 2021. During the pandemic, lockdowns caused people to stop going places, meaning that the demand for crude oil went down. In response, less was produced. When demand rose again after lockdown restrictions eased, there wasn’t sufficient supply to meet it, resulting in higher gas prices.1
2. Refining costs
Not all crude oil is created equal, and some costs more to refine than others. Some regions are also more expensive to transport that oil through, resulting in disparities in refining costs. Ultimately, these costs vary between types of oil being refined, the region they’re transported from, and the season it’s being transported during.2
3. Retail costs
The pricing at a particular gas station is dependent on numerous factors, and one of them is simply that: the particular gas station! Like any product, pricing for gas can be affected by the location it’s being sold in. There’s a reason a sandwich costs more on average in Manhattan than it does in rural Pennsylvania, there’s simply more demand for that sandwich in one place than the other. The same can be true of gasoline. Some gas station brands are also owned directly by refiners who can produce their own product, while others have to purchase their stock and resell it.3
4. Taxes and state fees
Different states have different taxes, so gas prices will frequently vary depending on the state you’re filling up in. Some states may institute taxes on gas that are intended to encourage eco-friendly practices and discourage heavy gasoline usage, while others take more of a hands-off approach. The federal tax rate on gasoline will, naturally, be consistent no matter what state you’re in. As of January 2021, there was an 18.4 cent federal excise tax per gallon of gasoline.4 As you might expect, higher taxes lead to higher gas prices, and vice versa.
5. Interruptions in oil distribution
Interruptions in oil distribution create disparities in supply since the expected amount of gasoline is not delivered. These can be anything that gets in the way of the expected flow of drilling, refining and distributing. Wars, natural disasters, and other accidents can all create these gaps. These interruptions typically cause gas prices to go up.5
6. Commodity traders
Commodity traders purchase futures contracts on various commodities (anything from wheat to gas) and then sell those contracts for profit. It’s like buying a company’s stock on the stock market, except instead of stock, it’s an actual product that will be taken to market and sold. Traders make their money by projecting what prices will be, buying lower, and selling higher. So if a commodity trader were to purchase a futures contract on gasoline, they’d want that gasoline to be worth more money in the future. Bidding between traders on that gasoline can cause its actual price to rise.6
7. Value of the U.S. dollar declines
When the value of the dollar declines, so does the profit made by anyone selling products for dollars. To compensate, producers will respond to declining dollar values by raising prices. This is true of any industry, and the fuel sector is no exception. If inflation rises, expect gas prices to follow suit.7
So, why do gas prices go up? Simply put all of the above. Many of the factors mentioned earlier play off of one another, such as distribution interruption and supply, and they are all always at play in influencing the price of gas, whether negatively or positively. Since the average person has effectively no influence on any of these factors, your best bet is to position yourself so that you are affected by rising gas prices as little as possible. Buying a hybrid car or some other efficient model is a good place to start.
However you prepare for the fluctuations of the gasoline market, you should always be prepared in case you find yourself out of gas one day. Learn more about what to do if you run out of gas.
1https://www.bls.gov/opub/mlr/2020/article/from-the-barrel-to-the-pump.htm, Accessed August 2021.
2https://www.eia.gov/todayinenergy/detail.php?id=5730, Accessed August 2021.
3https://www.convenience.org/Topics/Fuels/How-Branded-Gasoline-Stations-Work, Accessed August 2021.
4https://www.eia.gov/tools/faqs/faq.php?id=10&t=10, Accessed August 2021.
5https://www.energy.gov/sites/prod/files/2015/04/f22/QER%20Analysis%20-%20United%20States%20Fuel%20Resiliency%20Volume%20III.pdf, Accessed August 2021.
6https://www.thebalance.com/why-are-gas-prices-so-high-3305653, Accessed August 2021.
7https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-809294, Accessed August 2021.
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