Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local retail station competition. Additionally, gasoline prices can change rapidly due to crude oil supply disruptions stemming from world events, or domestic problems such as refinery or pipeline outages.

Seasonality in the demand for gasoline - When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer, when people drive more, and fall in the winter. Good weather and vacations cause U.S. summer gasoline demand to average about 6% higher than during the rest of the year.If crude oil prices remain unchanged, gasoline prices would typically increase by 5-6 cents from January to the summer.

Figure 2. Motor Gasoline Prices at Retail Outlets, 2002 Average Regular Grade, by Region
(dollars per gallon, including taxes)

Changes in the cost of crude oil - Events in crude oil markets were a major factor in all but one of the five run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council's study, U.S. Petroleum Supply - Inventory Dynamics. About 47 barrels of gasoline are produced from every 100 barrels of crude oil processed at U. S. refineries, with other refined products making up the remainder.

Crude oil prices are determined by worldwide supply and demand, with significant influence by the Organization of Petroleum Exporting Countries (OPEC). Since it was organized in 1960, OPEC has tried to keep world oil prices at its target level by setting an upper production limit on its members. OPEC has the potential to influence oil prices worldwide because its members possess such a great portion of the world's oil supply, accounting for about 38% of the world's production of crude oil and holding more than two-thirds of the world's estimated crude oil reserves.

Rapid gasoline price increases have occurred in response to crude oil shortages caused by, for example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. Gasoline price increases in recent years have been due in part to OPEC crude oil production cuts, turmoil in key oil producing countries, and problems with petroleum infrastructure (e.g., refineries and pipelines) within the United States.

Product supply/demand imbalances - If demand rises quickly or supply declines unexpectedly due to refinery production problems or lagging imports, gasoline inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers become concerned that supplies may not be adequate over the short term and bid higher for available product. Such imbalances have occurred when a region has changed from one fuel type to another (e.g., to cleaner-burning gasoline) as refiners and marketers adjust to the new product.

Gasoline may be less expensive in one summer when supplies are plentiful vs. another summer when they are not. These are normal price fluctuations, experienced in all commodity markets.

However, prices of basic energy (gasoline, electricity, natural gas, heating oil) are generally more volatile than prices of other commodities. One reason is that consumers are limited in their ability to substitute between fuels when the price for gasoline, for example, fluctuates. So, while consumers can substitute readily between food products when relative prices shift, most do not have that option in fueling their vehicles.

Proximity of supply - Areas farthest from the Gulf Coast (the source of nearly half of the gasoline produced in the U.S. and, thus, a major supplier to the rest of the country), tend to have higher prices. The proximity of refineries to crude oil supplies can even be a factor, as well as shipping costs (pipeline or waterborne) from refinery to market.

Supply disruptions - Any event which slows or stops production of gasoline for a short time, such as planned or unplanned refinery maintenance, can prompt bidding for available supplies. If the transportation system cannot support the flow of surplus supplies from one region to another, prices will remain comparatively high.

Competition in the local market - Competitive differences can be substantial between a locality with only one or a few gasoline suppliers versus one with a large number of competitors in close proximity. Consumers in remote locations may face a trade-off between higher local prices and the inconvenience of driving some distance to a lower-priced alternative.

Environmental programs - Some areas of the country are required to use special gasolines. Environmental programs, aimed at reducing carbon monoxide, smog, and air toxics, include the Federal and/or State-re- quired oxygenated, reformulated, and low-volatility (evaporates more slowly) gasolines. Other environmental programs put restrictions on transportation and storage. The reformulated gasolines required in some urban areas and in California cost at least three cents more per gallon to produce than conventional gasoline served elsewhere, increasing the price paid at the pump.

Seventeen states have passed legislation to restrict the use of the gasoline additive MTBE, but of these, only California, Connecticut, Kentucky, Missouri, and New York relied on the additive to begin with. MTBE removal requires large changes to gasoline production and distribution. California faced temporary supply dislocations and price volatility during the summer of 2003 as MTBE was removed from gasoline in the State. Other states may face similar issues as they make the transition to gasoline without MTBE.

Operating costs - Even stations co-located have different traffic patterns, rents, and sources of supply that influence retail price.

Copyright (C) 2005, Save My Gas.com. All right reserved.