What Determines Gas Prices Anyway?

Gas Prices

Owning a car is a privilege since you can travel anywhere, at any time. However, with the continual rise in gas prices, you will not drive as much as you want. According to Aljazeera, the price of gas rose to over $5 per gallon in the United States in 2022. With such prices, it is easy to blame individual oil companies for hiking gas prices. Contrary to popular belief, private oil companies cannot set gas prices at will. Instead, a major contributing factor to the change in gas prices is the laws of supply and demand. However, the laws of demand and supply for gas are different since its price is determined by the oil futures market. In oil futures markets, speculators predict the gas prices based on analyzing the behaviors of the consumers. Since the laws of demand may not always follow a particular pattern, there are other sure ways of determining gas prices. Below are five factors that determine gas prices.

5. Taxes

Each time you pay to fuel your car, you will already have paid excise fees. According to Investopedia, the excise fee is usually between 10-60 cents. The excise fees normally go towards improving highways or any other infrastructural projects. However, the government does not rely on excise fees alone. After all, the government has other projects to run. To further generate revenue, governments may impose other taxes like oil inspection fees, underground storage tank fees, oil inspection fees, and any other taxes. These additional taxes will now go towards other projects besides infrastructure. So, with more taxes, you can expect the gas prices to soar.

4. Refining Costs

When the manufacturers obtain crude oil, whether through mining or purchasing, they have to make it usable by refining it. Refining entails turning crude oil into vapor by putting it in a boiler. The vapor then moves to a distillation chamber, where it becomes liquid. Since oil refineries use a lot of machines to refine oil, the price of gas will be hiked. The price is meant to compensate for how much oil refineries spend purchasing crude oil and the necessary machines. However, oil refineries cannot rely on any machine to refine oil. Their machines have to comply with EPA regulations. According to EPA, oil refineries should use machines that do not release toxic fumes into the air. That means oil refineries need machines of good quality, which tend to be expensive. As you may have guessed, the price of oil will increase.

3. Distribution and Marketing

After the oil has been manufactured, it has to be shipped to gas stations across the country. The oil in the refinery moves through pipelines in batches to large storage terminals. Sometimes the oil will be mixed with fuel ethanol to comply with certain government and market specifications. However, before the oil is transported, it still has to be confirmed whether it is refined. If the oil does not meet the requirements, it is sent back to the refinery. Finally, the oil is delivered by tanker trucks to various gas stations. So far, we have seen the parties involved in distribution, such as the driver and oil-refinery worker. Since these are workers who need to get paid for their service, the oil price will have to be adjusted accordingly. Additionally, the money enables them to travel as far as possible to transport the oil. It is not enough to distribute oil to gas stations. For instance, you need to alert clients of your services. Remember, the oil industry is highly competitive. For the oil to be marketed, some money is needed, so that means the price of oil will increase. A common way of marketing oil is through television or radio advertisements. However, more people are on social media, so most marketing will be done online. If the company fully relies on the internet to market, the price of oil may go down since it is more inexpensive than television advertisements.

2. Station Markup

We have already established how the government spends excise duties. However, the workers at gas stations also need to be paid, so part of the money goes to them. There is no restriction on how much gas stations can charge in terms of markup. As a result, they are free to set any price, and that explains why most clients blame station markup for the price increment. Fortunately, the markup will usually be a dime or some cents. The gas stations also enjoy more freedom when the governments dictate the maximum required amount as markup. For instance, the government may have laws discouraging wholesalers from selling less than a certain percentage. This is important, so that small and private gas stations are not driven away by large chains.

1. Geopolitics

Oil-producing countries typically export oil to other countries. However, the factor that can cause a spike in oil prices is the instance of wars or conflict between them. During a war, there is a chance of a country invading the oil-producing country for its oil. Since the supply of oil is being threatened, the government of that country will increase the price, fearing that it may all be snatched. Of course, the locals of the oil-producing country begin to feel the pinch. Another reason oil prices soar is that the government is depleting its oil supply by manufacturing several weapons. Since the focus is on the war, the government may not have enough time to produce oil, and that would instantly accelerate its depletion. Due to the high risk of depletion in such a case, the oil price will increase.

Conclusion

It is always hard for most people to understand why oil prices increase. You cannot easily narrow it down to one factor since a lot of factors occur concurrently, which affect the oil pricing. Others do not understand the nature of oil prices due to ignorance. Most people end up blaming the wrong parties for increasing the oil, yet there are certain factors that have led to the price change. Governments understand how important oil is to most people. Therefore, they wouldn’t arbitrarily increase its price unless there were certain factors that forced them to do so.

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