Fuel prices often frustrate consumers because they can fluctuate so widely from one month to the next and even from one week to the next. While there are many factors that influence fuel prices, few consumers may understand this and simply shake their heads in confusion at the pump.
The single greatest factor influencing long-term fuel prices is the cost of crude oil, notes fuel giant Caltex Corp. on its website. The price of crude oil contributes to almost half of the retail price of gas, according to Caltex. This means that when the cost of crude oil goes up, gas prices at the pump will soon follow. Many factors influence the price of crude oil, which has been on the rise for years as a result of strong demand across the globe, limited production capacity and political instability in parts of the world that are rich in oil.
Strong economic growth across the globe and in particular in rapidly developing countries, such as China, has resulted in an increased demand for fuel. The U.S. International Energy Agency believes that we’re in the middle of the biggest increase in oil demand in nearly 30 years. This demand will likely continue to increase, as the U.S. Energy Information Administration predicts that the total world consumption of marketed energy will be 44 percent higher in 2030 than it was in 2006.
Meanwhile, oil companies have not been able to keep up with this demand. This is partly due to the fact that new pipelines take time to be developed. A shortage of working refineries to turn crude oil into usable fuel also results in inadequate fuel supplies and a large price difference between crude oil and ready-to-use fuels. In addition, wars and political instability in parts of the world that produce significant amounts of oil means that it’s more difficult for oil companies to extract and export oil from those countries.
Anyone who has been through a hurricane will tell you that when everyone simultaneously decides to gas up their cars, and stock up on fuel for generators, gas supplies in an area can dry up quickly and prices can skyrocket because people are willing to pay more for scarce resources. However, localized market conditions only affect fuel prices in the short term. Conversely, when there is enough fuel to go around, local competition can drive prizes downward.
Different countries impose different taxes on fuels, and different states in the U.S. impose different taxes as well. This means that if everything else remains equal, a consumer in one state may pay a completely different price at a gas pump than a consumer in a neighboring state, even if the state line is just blocks away. While the national average gasoline tax is 45 cents per gallon, according to the American Petroleum Institute, some states may charge as little as 19 cents a gallon while others may charge as much as 70 cents.
