Think You Know Why Gas Prices Rise Think Again

Every summer for the last decade, gas prices rose about 4%, on average, according to the Energy Information Administration (the U.S. government’s energy-number-crunchers). Just as an annual increase in gasoline consumption begins, prices rise for no apparent reason every year. What does this odd coincidence suggest about rising gas prices? Is it price manipulation designed to gouge vulnerable consumers? No, it is not.

The gasoline that fuels your summer road trip is different more expensive to produce than what you buy in the winter. Known as “summer-grade” and “winter-grade” gasoline, these products are annually rotated in and out of the supply in what is known as the seasonal gasoline transition. This is the primary cause of increased gas prices between Memorial Day and Labor Day.

Oil and gas prices are often moved up or down by unseen market forces. These pressures on price are generally unknown to the public.

For example:
Did you know that the value of your dollar influences what you pay at the pump? It does. In April of 2013, The Oil and Gas Journal published an article titled, “MARKET WATCH: Bearish inventories, stronger dollar drop oil prices,” that reported the following:

“…markets took another pounding Apr. 17 with…crude falling 2.3% to a new low for the year in the New York futures market due [in part] to a strengthening US dollar.”

OPECs (the Organization of Petroleum Exporting Countries) ability to cause scarcity in the marketplace can certainly influence prices, as well. However, as members of OPEC correctly point out, a factor beyond their control is the weakness of the U.S. Dollar.

Because oil is traded in U.S. currency, any depreciation of the dollar will translates into lower revenues for OPEC member states. What they fail to mention, however, are countermeasures that compensate for devaluation of the dollar. By curtailing production, OPEC artificially creates a shortage putting upward pressure on the cost of oil. Or, they simply raise prices, as happened in 1971 and as reported in Bloomberg in 2010: “The 13 percent decline in the Dollar Index since June has led some OPEC members to call for oil to rise to $100 a barrel.” The net effect on U.S. motorists is an increase in gas prices.

Geopolitical events certainly influence price fluctuations, but they dont always do so in a straightforward manner: Which crisis caused the highest run-up in global oil prices: Was it the 1973 Arab oil embargo, or the 1990 invasion of Kuwait by Iraq? Neither. The Iran-Iraq war caused the largest increase in global oil prices (when adjusted for inflation in 1980 dollars). On some level this makes sense considering both are major exporters of oil, but anyone who remembers the embargo will remember its catastrophic effects.

By far the most complicated factor influencing oil and gas prices are markets. A vast influx of money into oil futures has dramatically affected prices enough to cause the government to implement tighter regulations. In July of 2009 the situation was bad enough to spark suggestions by the CFTC (Commodity Futures Trading Commission) that wildly fluctuating oil prices were due to speculation. The following month, the FTC chimed in with regulations designed to curb manipulation of physical, and futures oil markets. It pays to remember these traders are doing precisely what they are supposed to be doing, as long as ethical guidelines are followed.

Lastly, there are seemingly minor influences which really do impact prices. Refining, and distribution costs, local taxes, whether youre buying in the city, or from a rural station, and even competition among local stations can have an effect on prices at the pump.

Obviously, many forces can cause oil prices to rise… and fall. Although no single factor can adequately predict price movement, the time-tested method of “supply and demand” still holds even if there are unseen hands pulling up, or pushing down the price that you pay at the pump.

Sam Jones takes a keen interest in the energy market and recommends the uSwitch price comparison website to find the best gas suppliers at the cheapest prices.

 

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