When Jean-Baptiste Alphonse Karr said, “The more things change, the more they stay the same,” he obviously wasn’t talking about gas prices. Those change all the time, in both the short and long term. According to data from Gas Buddy, between 2009 and 2019, the average price of a gallon of gasoline across the U.S. ranged from nearly $4 in April 2010 to just $1.69 in February 2016.
When it comes to the cost of gas, the one thing you can be sure of is that whatever it is today, it won’t be the same price for long. Even if it’s currently at rock bottom and it’s been that way for so long people have almost forgotten the pain of paying $50 to fill up the tank, you’ll be reading headlines about rising gas prices again at some point. There’s no way to pinpoint exactly when the price at the pump will rise or by how much, but it’s a pretty safe bet that it will eventually. And whenever it does, there are sure to be a lot of angry drivers looking for someone or something to blame.
For instance, when gas prices were at their peak in 2010, some politicians and pundits blamed low oil production and called for more drilling. Others, on both the left and the right, pointed their fingers at oil and gas speculators deliberately running up prices to make a profit. These easy targets made for good sound bites, but neither of them came close to the truth.
What really drives the cost of gasoline is far more complicated.
Why Gas Prices Go Up or Down
According to the U.S. Energy Information Administration (EIA), about 60% of the money you pay for a gallon of gas goes to pay for the crude oil that went into making it. Another 25% pays for the cost of refining, distributing, and marketing the gas, and the rest is federal and state taxes. Anything that affects these factors can drive the final price at the pump up or down.
1. Changes in Crude Oil Prices
If you select “Show Crude Oil Price” on the Gas Buddy chart, you can see how gas prices have tended to rise and fall in tandem with the price of crude oil. For instance, between 2010 and 2014, oil prices never fell below $70 per barrel and frequently spiked above $100. The price of gas was also consistently high during this period, staying between $3 and $4 per gallon. In mid-2014, when the price of crude oil plummeted to less than $50 per barrel, gas prices tumbled to less than $2 per gallon.
What drives crude prices themselves is largely basic supply and demand. When the oil supply falls, prices go up because all the people who want oil are competing for a smaller amount. Prices also rise when demand goes up — that is, when there are more people competing for the oil that’s available. Similarly, when supply rises or demand falls, prices go down.
There are a lot of factors that can affect either the supply or the demand for oil, some in the short term and some in the long term.
As the Gas Buddy chart shows, the prices of both crude oil and gasoline tend to shift up and down throughout the year, regardless of the long-term price trend. They typically peak during the spring and early summer when more drivers are hitting the road for vacations. When autumn comes around, demand drops again, and prices fall.
According to data from CXO Advisory Group, oil prices typically rise from March through May and fall in November and December. This coincides roughly with findings from NACS about gasoline prices, which tend to climb starting in February and peak around Memorial Day. However, seasonal changes in the price of gasoline also depend partly on refining processes (more on this below).
World events, such as wars, can affect either the supply or the demand for oil. For instance, the U.S. invasion of Iraq in 1991 disrupted Iraq’s oil production, reducing supply. A graph in Macleans shows how the price of crude oil more than doubled as a result.
More recently, in early 2011, the Arab Spring uprisings in Libya, Tunisia, and Egypt raised concerns that revolutions in those countries would disrupt oil production. As the Gas Buddy chart shows, oil prices rose above $100 per barrel at this time, spiking at $113 in April. When these countries stabilized under new governments, oil prices dropped again.
Anything that disrupts trade with oil-producing nations can also affect oil prices. For example, during 2018, prices rose in response to the Trump administration’s move to renew U.S. economic sanctions against Iran. As CNBC reports, energy market analysts predicted that up to 500,000 barrels of oil could disappear from the market as a result. (As it turned out, new sources of oil more than made up the difference, as discussed below.)
The trade war between the U.S. and China, by contrast, drove oil prices down in mid-2019. As CNN Business explains, the escalating exchange of tariffs between the two countries threatened to send the worldwide economy into a slump. Investors feared this would lead to industries cutting back on production, which in turn would reduce the global demand for oil.
Countries that are major oil producers can deliberately choke off the supply of oil to drive prices up. The nations of OPEC (the Organization of the Petroleum Exporting Countries), along with Russia, did that from 2017 through 2019, as National Public Radio reports. The move succeeded in halting a steep slide in oil prices, but its effect was limited, as OPEC’s share of the oil market had declined.
Oil-producing nations aren’t the only entities that can manipulate the price of oil. Speculators, individuals, and companies that trade oil futures for profits can bid up the price of oil just like they can with any other commodity. As noted above, many pundits blamed speculators for rising oil prices in 2010. However, the Federal Reserve estimates speculation actually accounted for only 15% of the run-up in prices from 2004 through 2008.
Changes in the strength of the U.S. dollar also play a role in the price of oil. When oil is sold on the world market, it’s priced in dollars. Thus, when the dollar is strong, the price of oil in dollars goes down. It’s not that oil is any less valuable; it’s just that the dollar itself is more valuable, so it buys more oil.
By contrast, when the dollar is weak relative to other world currencies, such as the euro, oil becomes more expensive for Americans to buy. However, it also becomes cheaper for people in other countries, leading them to buy more. As a result, world demand rises, driving up oil prices still further.
Advances in Technology
Most of the factors discussed above change oil prices only temporarily. Wars, sanctions, and supply manipulation all eventually come to an end, and the value of the dollar shifts over time. However, there are a couple of factors that can bring about more long-term changes in global oil supply or demand. One of these is improvements in the technology used to extract oil from the ground.
Consider world oil production in 2018. Despite OPEC’s production cuts, world oil production that year rose by 2.5 million barrels per day, according to the World Oil Review 2019 published by the multinational oil and gas company Eni S.p.A. The main driver of this growth was the U.S., which became the world’s top producer of oil in 2015. Between 2010 and 2015, it increased its oil production by more than 67%.
U.S. oil production during this period rose mainly as a result of new technologies, such as hydraulic fracturing, or fracking. Advances in fracking have made it easier than ever to extract shale oil, a form of crude oil trapped between layers of shale rock deep underground. The boom in shale oil has not only helped reduce dependence on foreign oil but made the U.S. one of the world’s top 10 exporters of oil.
Development in Emerging Countries
The other factor that affects oil prices over the long term is economic development in East and South Asia. As manufacturing jobs have shifted from the developed world to countries like China and India where labor is cheaper, these countries have needed more and more oil to fuel their growing industries. This drives up global demand and, consequently, prices.
Asian countries are behind most of the rise in oil demand in recent years. According to the World Oil Review, global oil demand grew by 1.4% in 2018, with half that growth coming from India and China alone. In 2018, China was the second-largest consumer of oil in the world, using more than 13,000 barrels per day. That’s nearly three times as much as it used in 2000, less than 20 years earlier.
2. Changes in Refining Costs
Although gasoline prices tend to move up and down along with crude oil prices, they’re not perfectly in sync. That’s because crude oil has to go through the refining process before it reaches the pump. If anything happens to disrupt that process, it can drive up the final price of gasoline.
Problems at refineries can include:
- Lack of Capacity. Tom Kloza, head of energy analysis for the Oil Price Information Service, explains in an interview with KTLA that refineries in the western half of the U.S. have less capacity — meaning they’re able to refine less oil — than those in the east. For the past century, Kloza says, this entire half of the country has not added any refining capacity, while gasoline usage has risen dramatically. That’s made it hard for western refineries to keep up with demand. Any kind of disruption in supply can result in shortages and higher prices.
- Planned Maintenance. Oil refineries periodically need to shut down for maintenance. According to NACS, planned maintenance, known as turnaround, occurs roughly once every four years. In other words, about one out of every four refineries needs to shut down, either fully or partially, in any given year. This typically happens in January or February, when gasoline demand is low.
- Unplanned Maintenance. Shutdowns for maintenance aren’t always planned. Sometimes, a refinery’s equipment breaks down, forcing a temporary shutdown. That reduces the available supply of gasoline, so prices rise. According to USA Today, a combination of planned and unplanned maintenance in spring 2019 reduced nationwide refinery utilization (the percentage of refinery capacity that’s being used) from 93% to 86%. As a result, gas prices were about $0.08 more per gallon than they had been in spring 2018, with higher increases in the West.
- Natural Disasters. Natural disasters can also force refineries to shut down. For instance, in 2017, several major refineries in Texas had to shut down due to flooding from Hurricane Harvey. This reduced the supply of gasoline by over 1 million barrels per day. As a result, gas prices spiked by $0.10 per gallon nationwide and more than doubled in Texas.
- Gas Reformulation. The gas you buy at the pump is mixed with additives to help it burn. In the wintertime, gas stations use additives that evaporate more easily, making it easier for cars to start in cold weather. In the summer, they switch to additives that evaporate less easily, producing less smog. Refineries must shut down temporarily as they switch over from winter to summer formulations, reducing supply and driving up prices. Moreover, the additives used in summer-blend fuel are more costly, and refineries aren’t able to make as much gasoline from each barrel of oil. These factors can make summertime gas as much as $0.15 per gallon more expensive than it is in the winter, according to NACS.
3. Changes in the Gas Tax
The final factor affecting the price of gasoline is the array of taxes imposed on it at the federal, state, and sometimes local level. These taxes are typically used to pay for maintenance on roads, bridges, and other transportation infrastructure.
Federal & State Taxes
The federal gas tax doesn’t change very much over time. It takes an act of Congress to raise it, and members of Congress tend to be reluctant to vote for any sort of tax increase. According to NPR, the federal gas in 2019 has been set at $0.184 per gallon since 1993, even as the cost of the road and bridge repairs it funds has risen by over 60%.
According to the American Petroleum Institute, state taxes and fees add an average of $0.363 per gallon to the cost of gas nationwide. However, this amount varies widely from state to state. California’s gas tax is the highest at over $0.62 per gallon, while Alaska’s is less than $0.15 per gallon. As a result, Californians are used to paying significantly more at the pump than people in other states.
State gas taxes have changed a lot more in recent years than the federal gas tax, typically in an upward direction. For instance, New Jersey’s gas tax jumped by a few cents per gallon in 2017 and again in 2018 after staying stable for over 25 years. It was the result of a 2016 law designed to raise money for the state’s severely underfunded Transportation Trust Fund, which pays for repairs to roads, bridges, and mass transit.
The Impact of Carbon Taxes
One other type of tax that could raise the price of gas on a nationwide level is a federal carbon tax. This type of tax fights climate change by making fossil fuels more expensive to encourage people to use less of them. The higher the price of gasoline, the fewer people tend to drive and the less carbon dioxide (CO2) and other greenhouse gases ther vehicles emit.
When Canada imposed a tax of 20 Canadian dollars per ton of CO2 equivalent, gas prices rose by about C$0.04 per liter (about US$0.11 per gallon). By 2022, the tax will rise to C$50 per ton, raising gas prices by around C$0.11 per liter (about US$0.21 per gallon).
However, Canada’s carbon tax has a silver lining for consumers. Because the tax is revenue-neutral, the money it raises will be divided up among all Canadian taxpayers. For most people, the Canadian government estimates, this annual carbon dividend will be more than enough to offset the higher prices they pay for gas and other fossil fuels. And, of course, if it succeeds in bringing emissions down, it will also reduce the high costs of dealing with climate change in the future.
Rising gas prices have their upside since they can help lower emissions and curb climate change. However, that long-term benefit can feel like cold comfort when you’re standing at the gas pump wondering if you can afford to fill up the tank.
Fortunately, there are ways to save money on gas even when the price is spiking. For instance, you can use smartphone apps such as GasBuddy to find the gas stations near you with the lowest prices. When you pay, use the best gas credit card you have to maximize your rewards on every fill-up.
Better still, you can change your habits to reduce the amount of gasoline you use. Switch to a bicycle or walk for short trips, combine multiple errands into a single trip, and learn to drive efficiently so you get better fuel mileage. Habits like these are good for the climate and for your wallet — a win-win.