What Makes Gasoline Prices Go Up & Down?
Congratulations! You’ve planned an impromptu weekend getaway! The car is packed. Kids’ iPads are charged. Last thing you need to do is fill up your gas tank.
But when you pull up to your local gas station, you can’t help but notice that the price of regular is up 15 cents since the last time you filled the tank.
So, what made the price of gasoline go up?
This blog outlines some key factors that move gasoline prices up or down. The content draws from a recent podcast by Scott Berhang, vice president of global sales at OPIS.
Listen to the podcast by clicking right here:
Understanding gas price fluctuations, as Scott explains, involves complex layers. Listen to a clip of him explaining that right here.
Much like any other commodity, fuel has a supply chain, from production of raw material to the delivery of final product. There are several layers of trade that take place before you pick up the nozzle at the gas station.
The fuel chain has a few stages that accompany these trade layers. We also call this the “fuel influence chain” because a disruption to any stage causes a ripple effect and influences the other stages.
First in the chain is the futures market, an exchange platform (also known as NYMEX) on which buyers and sellers can engage in paper trade of various fuel commodities.
The futures market affects the next stage of the fuel chain, which are spot markets. “Spot” purchases refer to fuel that is physically traded and spot deals are negotiated for, literally, “on the spot.” There are seven such markets in the United States located in specific refinery hubs.
Any movement in the futures market has a ripple effect on the spot market, which has a ripple effect on the third stage of the fuel chain – the wholesale rack market.
A rack is a fuel distribution point – usually along a pipeline – where fuel is supplied. You then take the rack price and add in all federal, state and local taxes, the cost to transport the fuel from the rack to the actual retail site. On top of that, most retailers add in their own “margin,” which is what they estimate their own profit to be. The final number is what you see posted at your gas station.
In an ideal world, this price would be stable. In the real world, changes in demand, disruptions in supply and geographical constraints play a huge part in gasoline price fluctuation.
Here are some key reasons gasoline prices go up or down:
- Seasonal trends – Economics 101 tells us that price is determined through law of supply and demand: When supply exceeds demand, prices fall; when demand exceeds supply, prices rise. In the United States, summers witness an increase in the demand for gasoline – schools are closed, people like to take vacations. Typically, the peak season for gasoline is April through September, and then it begins to wind down as the summer ends. As we start getting into the cold weather, we move to the diesel season, more closely associated with heating fuels.
- Geography is key – You perhaps factored location in when choosing where to buy property (are you a beach person or a mountain personality?) or the best fit for your career. Well, geography also extends to gasoline prices. If you live in California, you may pay a premium because of the state’s special fuel that complies with environmental regulations and may require additional effort in production. Fuel specifications vary from state to state or even within a state. For buyers in the wholesale rack market, it is critical to know which fuel is required in which market and realize that each has their own pricing dynamics. Here’s a clip of Scott explaining the market using an analogy about his (ahem) personal favorite fuel.
- Disruptions to fuel influence chain–
- Internal factors – Issues with production or distribution in the local markets will have an impact on the price of fuel. Example: If there is a hurricane warning, a refinery or pipeline may shut down for a day, which could drive spot prices upward and impact the racks. Conversely, if no production ends up being stalled by that hurricane, but people stick close to home and drive fewer miles, that can impact demand and send prices lower. Here’s a clip with more on that from Scott.
- External Factors – What happens in Venezuela, does not stay in Venezuela. It can impact fuel globally! The first stage of the fuel influence chain, the futures market, is particularly reactive to international developments. Large global events tend to have a psychological impact on the futures market and influence the direction of the prices. As highlighted earlier, the futures market can influence the other stages of the supply chain; monitoring futures is crucial as it is a daily movement in the oil market that is “most influential in the direction of prices.”
Tracking gasoline prices isn’t an easy task. Even for the experts. In OPIS’ latest outlook forecast review, we projected that the odds favoring a return to a $3/gallon or higher national gasoline price average are about 50-50. So, even we leave room for error. You can find more about what plays into that projection (and more) right here.
One of the key takeaways for those wanting to keep an eye on pricing is to watch both the futures and physical sides of the market. The OPIS Spot Ticker can help you there.
Lastly, it’s critical to keep an eye on oil and fuel market news. OPIS editors stay on top of supply-changing disturbances throughout the market, so you don’t have to do the extra legwork. We know that following the market can be complicated, so leverage tools like this as assets to help you stay on top of gasoline prices as they rise and fall.
The OPIS Crash Course: A New Way to Learn About Fuel Prices
At OPIS, we make it our goal to help people in the global energy market buy and sell with confidence. We see fuel price education as the first step to achieving that aim.
Each episode of the OPIS Crash Course will answer a key question in the fuel market related to the commodities we cover. Our goal is to bring you and anyone on your team up to speed on the dynamic fuel price marketplace, drawing on 40+ years of OPIS expertise.
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