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Gas Economy Explained: What Factors Determine Gas Prices?
When you notice that gas prices are on the rise, the first thing you may be thinking is, “How?!”.
Though consumers collectively gripe over the cost of gas, not everyone knows what is to blame for the high prices. Here you’ll learn the major factors that determine the price you pay at the pump and why they may not be changing any time soon!
The Reality Of Gas Prices
Many people think that gas prices are only determined by the cost of oil. Yes, the two correlate, but it is much more complex than that. Oil is a significant factor, however, there are lots of factors that impact average oil prices.
The U.S Department of Energy explains that crude oil prices are compromises 59.4% of the average retail price of gasoline in early 2018. The next high-cost factor is federal and state taxes average about 18.3%. That is then followed by refining costs, profits, distribution, and marketing.
The cost of oil between 2007 and 2016 averaged 62% of the average retail price of gasoline. The next highest cost factor is federal and state taxes, averaging at 15% before refining costs, profits, distribution, and marketing.
To better understand what determines gas prices, take a look at the supply, demand, inflation, and taxes. Supply and demand tend to get the most focus and blame, but inflation and taxes are also responsible for spikes in gas prices.
Some simple rules of supply and demand include the predictable impact on oil prices. You will not find oil coming out from the ground in the same way everywhere. It is ranked (or graded) by its viscosity (from lighter to heavier) and by the level of impurities it has (sweet to sour). The gas cost is normally quoted by its light/sweet crude.
That kind of oil is in high demand due to the fewer impurities and how much fewer time refineries take to process it, as long as oil rig accidents are avoided. The thicker or heavier oil gets, the more impurities it has and requires additional processing to refine it to gasoline.
Light/sweet crude was once widely available and heavily sought after in the past. It is not much harder to obtain, causing oil prices to rise. Compared to heavy/sour crude which is more widely available around the world, those gas prices are much lower and require less of an investment.
There have been major changes in the demand for gasoline. It's often set by the number of people who are using oil for their automobiles. This spike in the number of people on the roads continues to expand, especially in parts of the developing world.
In places like China and India, the population for both countries surpasses one billion, and are experiencing an expansion of their middle class. That particular class is more likely to drive more cars and consume more gasoline over time. For example, China is building over 40,000 miles of new interprovincial express highways to aid in this growth of automobile drivers.
In comparison to the U.S has about 86,000 of interstate highways. Whereas in India, there are already plans to build an additional 12,000 miles of expressways by the year 2022. Cars on either highway are likely to consume more gasoline and this creates a much higher demand for it.
Many countries are subsidizing the retail cost of oil to motivate a higher demand for oil. Alterations to this subsidy affect the demand for gas. This is another one of the gas factors to price increases or price decreases.
Prices help with allocating scarce goods. Despite the demand for gasoline being more elastic long-term, smaller disparities in the supply and demand chain can have a large impact very quickly. Having an inelasticity of demands causes gas prices to increase, and the demand to decrease by very little.
A problem here is with people locking into their present-day lifestyles. They might change their fuel consumption through purchasing more fuel-efficient vehicles, taking public transportation or simply traveling less. However, they won’t do that in response to a spike in gas prices fast enough to cause any real change.
The final cost of oil will balance the supply of oil with demand as well as the global market for gasoline. Taxes and inflation typically account for the largest relative increases in the price of oil. The ultimate goal is to establish a balance between the two.
When There Is Inflation
Inflation is when the average rate at which the prices of goods and services increase. In the U.S, if an item costs $1 in 1950 then it could easily cost $10.45 in 2018. So in 1950, when gas costs were at about 30 cents per gallon, they would have inflated to about $3.13 per gallon present day.
This is all assuming that the taxes, supply, and demand all remained the same. The inflation level varies by country and can also affect the cost of oil.'
When There Are Taxes
The tax per gallon of gas in 1950 was approximately 1.5% of the price. Back in January 2017, the local, state and federal tax on a gallon of gasoline was 19,5% of the final price. Which means that taxes added nearly 48 cents to the price increase per gallon of gas.
This means that taxes can add almost 48 cents to the price of a gallon of gas. Federal tax can add up to 18.4 cents, the state tax adds up to 27.3 cents and the local or other taxes make up 4.3 cents per gallon. Some of this can make taxes the biggest cause of gas prices going up.
The Bottom Line On Gas Prices
During the short term, gas prices may rise or fall since the demand for gasoline is inelastic. People making small changes in their use for gas can largely change the cost of oil. This pattern will also help balance the supply and demand for oil.
Gradually, we should expect to see lower fuel consumption as people decrease their dependence on gasoline worldwide. This would undoubtedly impact the price of gas you’re used to paying at the pump!