Why do gas prices rise and fall? 5 driving factors

When it comes to gasoline prices, what goes up must come down – and vice versa.

Or so it seems to US motorists, who have been on a roller coaster ride with gas prices over the last decade. In 2008 alone, the national average jolted above $4 a gallon in the summer before plunging to around $1.85 a gallon in November. Gas prices are notoriously fickle, spiking unexpectedly or suddenly tumbling at various points throughout the year.

Why do gasoline prices go up and down so much across the US, and what causes the changes? There are a variety of factors at play – some seasonal, some state-specific, some globally significant, and some the result of unpredictable natural disasters.

At about $3 a gallon, current rates at the pump are good news for motorists who’ve paid closer to $4 a gallon for many of the past several years. It means money everyday Americans save at the pump can be spent elsewhere, giving the overall economy a lift. But low prices can hurt energy firms that depend on higher prices to finance exploration. Cheaper fuels also promote the everyday use of larger, less-efficient vehicles and can delay investments in cleaner energy sources.  

The most recent price drop can be attributed mostly to basic supply and demand.

“If it were not for the recent boom in North American crude production and improving fuel efficiency of US cars, it’s likely drivers would have paid $4 a gallon or higher in recent years,” says Michael Green, spokesman for automotive group AAA. “The US is making more crude and gasoline – improving the supply situation – at the same time that cars are growing more fuel-efficient and demanding less gasoline.”

So with all the new oil, shouldn’t US gas prices be even lower than $3?

Not necessarily. Gasoline is inextricably linked to the crude oil from which it is refined. Oil is traded globally, which means developments halfway across the world can influence the price at the corner gas station. Right now, demand might be relatively flat and supply rising in the US, but developing Asian economies are increasingly dependent on oil. Last year, China overtook the US as the largest oil importer, using it to fuel cars and create products for an expanding middle class. That extra demand – combined with the rising cost of oil production – has kept upward pressure on oil and gasoline markets.

Still, prices today are lower than they’ve been in years – and lower than they would be without the US oil boom.

Here are five major factors that determine gasoline prices:

Elaine Thompson/AP
An American flag flies at a gas station advertising a discounted price for gas at $2.99 per gallon, with the purchase of a car wash, Wednesday, Oct. 29, 2014, in Lynnwood, Wash.

1. Oil: A volatile commodity

Charlie Riedel/AP/File
A pumping unit sucks oil from the ground near Greensburg, Kansas in 2012. US oil output is surging so fast that the US rivals oil giant Saudi Arabia.

The most obvious determinant of gas prices – making up 67 percent of the price according to the US Energy Information Administration – is the cost of the resource gas comes from: crude oil. Fluctuations in gas prices tend to track fluctuations in crude – and currently, with oil prices sliding to the lowest levels in years, gas prices are sliding as well.

That fall in oil prices is the result of booming North American production, Saudi Arabia’s hesitance to cut output, and a drop in Asian demand. For more on why crude oil prices have fallen 25 percent over the course of summer 2014, check out the Monitor’s explainer on the precipitous oil price drop.

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