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Gasoline Price Fluctuations

Basics

Why do gasoline prices fluctuate?

Retail gasoline prices are mainly affected by crude oil prices and the level of gasoline supply relative to demand. Strong and increasing demand for gasoline and other petroleum products in the United States and the rest of the world can place intense pressure on available supplies. Even when crude oil prices are stable, gasoline prices fluctuate because of seasonal demand and because of local retail station competition. Gasoline prices can change rapidly if something disrupts the supply of crude oil or if there are problems at refineries or problems with delivery pipelines.

Seasonal demand for gasoline

Retail gasoline prices have historically tended to gradually rise in the spring and peak in late summer when people drive more frequently. Gasoline prices then decline in the winter. Warmer weather and vacation driving generally cause U.S. summer gasoline demand to average about 7% higher than demand during the rest of the year. Gasoline formulations and specifications also change seasonally. Environmental regulations require that gasoline sold in the summer be less prone to evaporate during warmer weather. This means that refiners must replace cheaper but more evaporative gasoline components with less evaporative but more expensive components. From 2004 through 2014, the average monthly price of U.S. retail regular gasoline in June, July, and August was about 47 cents per gallon higher than the average price in January.

Crude oil supply and prices

Crude oil prices are determined by worldwide supply and demand. Events in crude oil markets that caused spikes in crude oil prices were a major factor in all but one of the five major run-ups in gasoline prices between 1992 and 1997.

Long lines at a Maryland gas station in 1979

Source: Warren K. Leffler (public domain)

Oil crises lead to higher prices

Rapid gasoline price increases occurred in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf War in 1990.

Crude oil prices reached record levels in 2008

World crude oil prices reached record levels in 2008 as a result of high worldwide oil demand relative to supply. Other factors that contribute to higher crude oil prices include political events and conflicts in some major oil producing regions, as well as other factors such as the declining value of the U.S. dollar (the currency at which crude oil is traded globally).

The influence of OPEC on world oil prices

The Organization of the Petroleum Exporting Countries (OPEC) has significant influence on world oil prices, because its members produce about 40% of the world's crude oil. OPEC members are also the only countries that have spare production capacity and the ability to bring more oil into production relatively quickly. Since it was organized in 1960, OPEC has tried to keep world oil prices at a target level by setting production levels for its members.

Gasoline supply and demand imbalances

Gasoline stocks are the cushion between major short-term supply and demand imbalances.

Source: U.S. Energy Information Administration, This Week in Petroleum, September 2, 2015

Gasoline prices tend to increase as the available supply of gasoline grows smaller relative to real or expected demand or consumption.

Gasoline inventories provide a cushion

The supply of gasoline is a function of crude oil supply and refining, imports of refined gasoline, and gasoline inventories (stocks). Stocks are the cushion between major short-term supply and demand imbalances, and stock levels can have a significant impact on gasoline prices.

If refinery or pipeline problems and/or reductions in imports cause supplies to decline unexpectedly, gasoline inventories (stocks) may drop rapidly. This drop in inventories may cause wholesalers to bid higher for available supply over concern that future supplies may not be adequate.

Imbalances have also occurred when a region has changed from one fuel type to another as refiners, distributors, and marketers adjust to the new product.

Seasonal and annual variation in supply and price

Gasoline may be less expensive during summers when supplies are plentiful compared with other summers when supplies are not. Prices for all commodities fluctuate, but gasoline prices are generally more volatile. For example, consumers generally have options when it comes to food so they can substitute other food items when prices change, but most consumers do not have other options for fueling their vehicles.

Last reviewed: January 12, 2016

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