Virtually anyone who drives a motor vehicle in the United States knows that gas prices have been quite high for some time now. For context, even when inflation is accounted for, gas prices are generally higher than they’ve been for about five decades.
The rising cost of gasoline doesn’t just impact how much money drivers spend refueling their vehicles. It’s also important to remember that gasoline prices can impact the cost of shipping goods throughout the nation. As a result, rising gasoline prices have yielded an increase in the cost of various consumer products. Coping with these financial and economic developments can be difficult and frustrating for consumers during the best of times. In the aftermath of a pandemic, during which many Americans were out of work or earning less than they typically would, such developments can be particularly challenging to adjust to. Consumers want answers. They understandably wish to know why gas prices are so high and what the process of setting gas prices involves. Various factors contribute to the price of gas. The following are among the most noteworthy:
The cost of crude oil
This is the primary factor influencing gas prices. The Energy Information Administration Estimates that, as of now, approximately 60% of the price of a gallon of gasoline can be attributed to the cost of crude oil. This marks a significant increase in the degree to which crude oil’s price influences the cost of gasoline. For example, in April 2020, the cost of crude oil accounted for only approximately 25% of the cost of a gallon of gas. However, this was partially due to the fact that the pandemic had resulted in a major decrease in demand for fuel. That said, historically, crude oil’s price has not tended to influence gasoline’s price as substantially as it currently is.
The war in Ukraine
It’s worth noting that no country produces more oil and petroleum products within the US. The US is among the top exporters of such products in the entire world. However, second only to China, the US is also one of the top importers of oil. One significant reason for this is the fact that most refineries in the US are designed to process types of oil different from those produced in the country. Although it is technically possible to modify these refineries so that they can process more US produced oil, doing so would be very expensive and time-consuming. All of this is to say that the US relies heavily on other countries for its crude oil. Thus, various types of geopolitical developments and crises can both directly and indirectly affect how much money Americans might have to spend on a gallon of gasoline. Specifically, Russia’s war with Ukraine has resulted in the country exporting significantly less oil than it typically has in the past. This is noteworthy given that Russia has historically been a major oil exporter. With Russia exporting less oil than usual, prices have risen.
How are gas prices set?
It would be impossible to explain in a short overview all the complexities that are involved in the setting and determination of gasoline prices. Again, these are issues involving a wide range of factors. In general, though, experts agree that illegal or unethical behaviors have not contributed to a rise in gasoline prices. Like the price of virtually all other goods, gasoline prices are determined by supply and demand. This reaffirms the points made in the above sections of this article. Due to various circumstances, crude oil, the key raw material necessary for the production of gasoline, is not as widely available as it has been in the past. However, now that the pandemic is winding down, demand for fuel is up.
When crude oil is in short supply but demand for it is high, it is natural that its price will rise substantially. It is also worth noting that American producers of oil have been reluctant to produce more, despite the urging of the Biden administration. This is partially due to the fact that those in charge of these companies believe producing more oil will result in a decrease in its value. Additionally, they state that they believe more Americans will be interested in purchasing electric vehicles in the future, and therefore they should not waste their resources producing more oil than they currently are. These realities may do little to ease the concerns of Americans who are frustrated with how much they are paying at the pump.
However, there may be long-term solutions to this problem. Many experts have suggested that it can be possible to essentially revamp the entire energy market as it currently exists. Significantly adjusting how we acquire crude oil and other such raw materials could lead to long-term reductions in gas prices. It may be some time before we see such major changes. Luckily, those with experience studying the energy market believe achieving these goals is not impossible.
DOWNLOAD THE APP
Start rounding up and saving to pay down your car loan faster