Gasoline Prices Why Do Gasoline Prices Fluctuate

Gasoline Prices

Why do gasoline prices fluctuate so wildly and frequently? One month the price of gasoline is around $3.50 and the next month prices have jumped to $4.00. Why does this happen? There are several reasons that are given by authorities and other sources and they will be presented in this paper.

Reasons Why Gasoline Prices Fluctuate

According to the U.S. Energy Information Administration (IEA), the price of crude oil on the world market is a "major reason" for the changes in gasoline prices and ultimately crude oil prices are the reason for the extremely high prices of gasoline in the U.S. The price of crude oil is "greatly affected by levels of supple relative to actual and expected demand…" for the various petroleum products that are made from crude oil including gasoline.

In 2012, for example, oil prices went up and down on a wild roller coaster ride which was a reflection of "…concerns and expectations for the world oil supply, economic conditions, and petroleum demand," the EIA explains. From January to March, 2012, there was violence and social "turmoil" in the countries of Syria, Yemen, and South Sudan, and those disturbance created what the EIA calls "…a tightening of world oil supply." But in June the Organization of Petroleum Exporting Countries began producing more oil, as did the United States, and hence the prices for gasoline at the pump went down, the EIA explains.

But wait, in the summer of 2012 gasoline prices rose again, and the EIA claims this was due to "…seasonal increases in petroleum demand" as well as concerns about possible oil supply disruptions in the Persian Gulf. The EIA also notes that "refinery outages" has an impact on the price of gasoline; also "global demand for petroleum products" impacts the price of gasoline.

The About.com website (owned by The New York Times) echoes the EIA in terms of explaining the fluctuation of gasoline prices. High crude oil prices cause high gas prices, according to About.com journalist Kimberly Amadeo; and the fluctuation of crude oil prices accounts for 72% of the price of a gallon of gasoline. The other 28% of the explanation accounting for changing oil prices results from "…distribution, refining, and taxes" (Amadeo, 2013). Getting more specific than the EIA as to the causes of gasoline price changes, Amadeo explains that oil prices are "…primarily controlled by oil futures contracts, which are traded on the commodities futures exchanges."

In other words, investors have a lot to do with gasoline prices; when speculators believe the cost of crude is going to be higher, they "…bid it up even higher" and hence, commodities traders create a "self-fulfilling prophecy by bidding up oil futures prices" (Amadeo, p. 1). The bidding by commodities traders (which they do to make profit) leads to what Amadeo calls an "asset bubble," and, "unfortunately, the one who pays for this bubble is you!" (Amadeo, p. 1).

U.S. Congressman Randy Forbes explains that "breaks in the distribution network," which happened in the aftermath of Hurricane Katrina, and "…general instability in major oil producing regions"; he is alluding to the Middle East (Iraq), South America (Venezuela), and Nigeria (Forbes, 2013). Forbes also blames a "decline in the value of the U.S. dollar" (which is the currency in which oil is traded on the global market) and "refinery imbalances" for the wildly changing gasoline prices.