What Affects Gas Prices

Gas prices have changed significantly over the past year as a number of factors have affected the price of crude oil which directly impacts the price at the pump. Many Americans complain of high gas prices, however it is important to understand that pricing differs all over the world and in both Canada and Europe gas is significantly more expensive than in the United States. Understanding what affects gas prices can sometimes be a complex matter as there are numerous factors that go-into determining the final price of gasoline.

Crude Oil Production and Gas Prices

Supply and demand are very relevant factors when looking at the price of any finite resource and this particularly applies to gas. OPEC is the organization in control of a majority of the world’s oil and thus plays a pivotal role in regulating the supply – and in many ways, the price of oil.

The United States uses around twenty percent of the world’s oil making it a major consumer. As demand for oil continues to increase, OPEC must regulate production to ensure that there is adequate supply. If demand for oil suddenly spikes or drops, OPEC must adapt and change production rates – it is these fluctuations in supply and demand that cause changing gasoline prices. Increased demand from developing countries like China and India also drives the price of oil up as the middle-class continues to grow. In these countries, a growing middle-class means more people using cars as well as more consumers which in-turn drives demand for shipments of more products causing increased gasoline consumption.

Geopolitics and Gas Prices

While supply and demand are key factors in gasoline prices, geopolitical events can cause fear over potential access to oil oftentimes causing the price of oil to increase. When Hurricane Katrina struck the Southern United States many oil refineries had to be shut-down, causing an immediate spike in gas prices as supply had suddenly been disrupted – but demand continued to grow. Military conflicts in the Middle East caused concern over potential supply disruption early-on in the Iraq war which increased oil prices due to supply fears. Political instability in places like Nigeria and Venezuela also affects gas prices as these countries also play a role in the global oil supply.

Gas Price Differences Across the United States

Gas prices vary substantially from state-to-state and this has a lot to do with demand as well. In less populated regions of the U.S. it is not surprising to find cheaper gas. This is true within cities as well – try driving from South Central Los Angeles to Beverly Hills and you will find gas prices increase the closer you get to this prime location.

California has reformulated gasoline that meets stricter guidelines than those required by clean-gas laws. This provision makes gas in California burn cleaner but can also mean a higher price at the pump due to the additional processing required.

The Midwest saw gas prices far above the national average as they required ethanol-blended gas before the rest of the country. Since this special blend of gas was not as readily available it was quite possible that demand could exceed supply and thus pricing was higher in the middle of the country. While this became a national standard in 2007 it is factors like this that can produce varying gas prices from state to state.