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Who or what sets the price of gas? Some insight into this timeless question

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On: Sat, May 7, 2016 at 8:26AM | By: Bill Wilson


Who or what sets the price of gas? Some insight into this timeless question

Anyone who thinks our economic system is sane hasn’t bought a gallon of gas lately. Whether the cost is up or down, it almost never stays the same for long. The price at the pumps gyrates up and down with the maddening frequency of a hyperactive hummingbird. Even more discomforting is the apparent lack of reasons for the constant shift. It’s as if a cabal of fickle service station owners is basing the cost on whatever direction the wind is blowing at any given moment.

But never fear; there is a method behind the madness. Here’s a look at the factors that keep the price of gas in an eternal state of flux. Some are relatively well-known, others are obscure to everyone but economists and other math geeks. However, all of them shed some light on the perplexing world of petroleum prices.

Quality and Quantity
One barrel of oil is rarely the same as the next. The syrupy sludge comes out of the ground mixed with all types of impurities. Refiners must filter these out in order to create the product we know as gasoline. The more impurities, the more it costs to eliminate them.

The gold standard among grades of oil is called “light, sweet crude”. It requires minimal refining. Because of this, it costs more for petroleum processors to purchase. Naturally, they pass the extra cost on to you, the consumer.

At the other end of the scale is “heavy, sour crude.” While this may sound like your crotchety old uncle, it’s actually a description of much of the stuff that oil wells suck out of the ground. The more heavy, sour oil the refineries have on hand, the more it costs them to transform it into a usable product. Naturally, they pass the extra cost on to you, the consumer.

Supply and Demand
Virtually everyone is familiar with this principle. Simply put, it states that the stuff people want cost more than the stuff they don’t want. That’s why diamonds are expensive and in-laws are cheap. People crave the first item and avoid the second. When the economy is vibrant and growing, both people and businesses are doing more driving. This creates greater demand for gasoline and, hence, higher costs at the pump.

On the other hand, an economic downturn causes businesses and households to drive less and hang out around their home base more. That’s why gas prices plummeted back in 2008, when the world economy almost experienced a second Great Depression. So, in a way, rising gas prices are part of the cost we incur for a growing economy—though the two do not always correlate with each other.

Investment Speculation
This is the factor that makes little sense to average folks, and for good reason. It turns out that the world’s rich and successful got their money from being shrewd gamblers. While this may contradict everything you were taught about hard work and thrift as a kid, it’s nonetheless the way things are. The wealthy are constantly trying to forecast the future so they can put their money in places where it’s likely to grow.

One of the ways they do so is by purchasing what are called “futures.” Basically a future is a bet that the price of a given commodity will increase down the road. If the bettor’s prediction is correct, then he or she will make money. If the gamble is wrong, then the person who owns the future loses money.

The more investors believe the price of gas will go up, the more each future will cost. This in turn drives up the cost of fuel, making the prediction a self-fulfilling prophecy. Of course, sometimes the gamblers get it wrong, but you have to take risks in order to make money in the first place. The super-rich are right more often than they’re wrong, which is what separates them from you and your kids.

There are other things that affect the cost of fuel, as you may have guessed. Discussing all of them would require more time than any sane person is willing to spend. But the three factors outlined in this article are the major causes for how much you pay at the pump. So now you have some idea for why the price of gas goes up and down. Now, if we can only figure out how Washington works, we might finally get some peace of mind. In the meantime, happy driving!




Comments

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Nnajesha | 6:56AM (Tue, May 10, 2016)

Thanks for the article. I can't agree that if people want the gas gasoline - its more expensive, and when there is crises and nobody drives, prices go down. Nowhere in the world hasn't been like this, because businesses has to cover the expenses anyway. so if nobody buys gasoline, it means that they make prices higher no to go bankrupt and when there is plenty of buyers, they can lower the prices to attract more and more customers.
Servicing Stop has a great blog by the way! They catch all the news from all main car brands and bring it to you as everyday and all in one place. You also can find that they do car servicing and MOTs cheaper than anywhere else.



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