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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Driving Doldrums: Gas Prices on the Rise - Again

Here we go again—US gas prices are increasing, with AAA putting the average price at around $3.50+, and drivers wondering if they’ll ever figure out how to predict prices at the pump. They won’t--because even analysts find it challenging.

Let’s try to simplify, if only to demonstrate why it’s impossible to predict gas prices.

First of all, gas prices rise along with the price of oil, which itself is driven by a number of things, from basic supply and demand to Wall Street speculation and unrest in the Middle East--just for starters.

From December to January, the price of oil increased 10%. According to the US Energy Information Administration (EIA), the price of crude oil accounts for 68% of the price of one gallon of gas. So oil prices are your biggest factor in attempting to determine fluctuations in gas prices. 

Related Articles: 2013: Cheapest Gas in 4 Years?

The other determiners include taxes, the cost of refining gas and marketing and distribution prices. Here, refineries play a key role but only insofar as speculators respond to refiners’ actions. About this time every year, some refineries go offline in order to adjust refining operations for “summer gas”, which is refined differently in order to prevent smog that is more easily accumulated in warmer weather. This happens every year, of course, but the recent trend is for speculators to respond to it earlier each year. 

But it is the price of oil that contributes to the bulk of the fluctuations in gas prices, and it is production (supply and demand) and speculation that drive oil prices more than anything.

On the production side of this equation, the last several months have seen OPEC lower production by some 1 million barrels per day.

Speculators are the US drivers’ biggest nightmare. Oil prices are set in the futures market through contracts that give traders the right to purchase oil by the barrel at a predefined price on a predefined future date. This is the speculators’ playground.

Speculators bid on oil futures contracts and these aren’t just individuals—this has metamorphosed into something much bigger, with institutional investors now in the game, including pension and endowment funds. Wall Street speculators are believed to contribute much to the short-term swings in oil prices, as they trade oil futures for short periods of time, for fast profit.

Related Articles: Why U.S. Energy Independence Means Pump Pain

So what will you pay for gas this year, overall? Analysts think the overall average will be a bit lower than last year, but one should take care when speculating on the speculators. Speculation aside, one can only hope that prices will be at least balanced out by economic expansion and increased US oil production. The overall picture emerging is that while gas prices may not be as high as they were last year, they won’t be decreasing by any significant amount. 

For Americans—who spent almost $3,000 on gas last year, per household—this is unacceptable, even though this represents an average 4% of daily income that is well below the average 6% spent by Western European consumers. Or consider China, where one gallon of gas costs the average person about 30% of his or her daily income.


Americans find this hard to swallow because this average represents a doubling in 10 years, and it’s not because they’re using more gas. 

The good news is that when gas prices increase it generally indicates an improving economy.

By Charles Kennedy for Oilprice.com

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Leave a comment
  • teseeker on February 12 2013 said:
    What would the price of gasoline be if we refined our own oil from the light sweet crude of the world's largest oil pocket in North Dakota and let the Chinese buy from the Oil futures open market? Why do we haul it from the furthest point away rather than use our own? And why would we ever frack rock unless it's to destroy the water table to chase farmers to the cities?
  • Steve LaBonne on February 12 2013 said:
    teseeker- oil is a fungible commodity with a global market. The answer to your question is, to a first approximation, no difference.
  • WiccanDruid on February 12 2013 said:
    Stop using combustion engines. Transfer to something else. Dont buy gasoline. They're too watered down for your engines anyhow ~ so they can earn a buck more for your purchase. I know, I'll get ignored on this or maybe this comment will be deleted. Who cares, Gasoline is #1 household debt maker. Debt is slavery and you work to pay your bills off. What A JOKE America is.
  • MohammedCohen on February 12 2013 said:
    Remember the boiling frog syndrome? That's what the Americans are in the state of slow heat. Oil companies know that the same gallon they sell in rest of the Western world as well as most of the other parts of the world (with the exception of oil producing Middle Eastern countries)for over $7 per gallon must be paid by Americans as well so they are creating their phoney Middle East turmoil that pays them billions upon billions of dollars of windfall profits. Eventually US Corporate America must create a "live or die situation" that would make the dumb American accept the high prices of oil bringing these prices in line with the rest of the world. This is all a game well planned by the Globalist cabals. Read "Resne.com" and watch RT.Com and quit watching Mainstream Corporate propaganda by CNN, ABC, CBS, NBC and the rest! Educate yourself and prepare for the cliff hanger soon to be laced all over our stupid USA!
  • gefitz on February 12 2013 said:
    Taxes are NOT to blame for fluctuating gas prices. Tax rates remain stable at either a percentage of the price per gallon, or is set at a static amount per gallon.

    Please stop spreading FUD. The problem is primarily one of rampant speculation in both crude and product markets.
  • Cutlass on February 12 2013 said:
    The reason prices are so high and fluctuate so greatly is because there is NO competition. You think there is, but in the dark boardrooms, the same faces rule the market.
  • abinico warez on February 12 2013 said:
    Just a short note to Jen Alic. US is a net oil exporter - yeah really! Look it up. Venezuela is also a net oil exporter. In Venezuela gas is about $1 gal. In US gas is about $3.50 gal. Much more interesting if you explain this.
  • Terry on February 12 2013 said:
    Well, it is the greatest lie forced on the whole world. SPECULATION, greed and a get mine and damm everyone else attuide. No competitors, run by 5-7 companies, supported by the US government (which by the way, we the people need TERM LIMITS on our representative. ) Ask why they closed 26 refineries on the west coast alone from 1999- 2001. Choke the supply, drive up the price, simple plan. This most likely will not get printed, but the truth seldom does these days.
  • who_cares on November 21 2013 said:
    Just a short note to abinico warez. The U.S. is __NOT__ a net oil exporter and hasn't been one since the 1940s.

    The U.S. currently produces only about 7.5 Mb of the roughly 18 Mb of oil it consumes every day.

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