What are the main causes of oil price fluctuations and hence fuel prices at the pump?
Now there’s an Econ 1.001 assignment for you.
Supply and demand, and greedy people being greedy.
Oil doesn’t have an infinite supply. Since there is a fixed supply, any reduction in supply (like the whole situation with Russia and the Ukraine) and the price goes up. Most people will pay that price for what oil they can get because you don’t want to be that guy that wasn’t willing to pay the higher price and now your country has no oil for gasoline and your entire country grinds to a halt.
But then some people don’t need the oil that bad, and will cut their purchases significantly when the price goes up. This reduces the demand, and now there is more oil available for other folks to buy, so this drives the price back down since no one is struggling to find oil.
But then maybe there’s a bit of an economic boom. People are buying more stuff, companies need to ship this stuff, so more oil is being used to ship stuff around. This increases the demand, making it harder for everyone to get the oil that they need, and the price goes up.
In other words, basic supply and demand economics.
But then you have OPEC, which is a bunch of countries that banded together to control the price of oil so that they could all make more money. This large group of countries will intentionally limit how much oil they sell so that they can drive the price up. But this has limits. There’s a whole bunch of oil that is difficult to get to. If the price of oil is below roughly $100 per barrel, then it’s not economical to get to this oil because you’ll spend more extracting it than you’ll make in profit. But if the price goes above $100 per barrel and stays there, then all of a sudden it does become economically viable to go after this oil. So OPEC has to play a little game of how high can they drive the price before everyone starts to tap into the shale oil. Once everyone starts extracting that oil, then OPEC won’t be able to control the price of oil any more. This has some interesting political implications as well, since places like Canada would suddenly become more of an oil exporter than places like Saudi Arabia and Kuwait.
So yeah, supply and demand, wars, politics, economic alliances, and economic booms and busts all factor into it.
There is an additional hand in oil prices. If they go too high, it causes inflation and slows down the world economy, which would tend to have the ‘big oil’ owners lose wealth, do to their wealth is based in the world’s economy which they are hurting. Though they have used prices above this level for a short time to influence things like our elections (very evident in our last election).
They also have had a history of crashing oil prices to drive out competitors who needs a high price per barrel to produce such as many of US domestic oil production. So anti-competitive practices as well.
In addition to the detailed info from engineer_comp_geek, there is another factor re: OPEC.
OPEC is a voluntary group or independent (and often unfriendly) countries. They limit the production of oil by setting varying quotas for all of them (like 10% less than you produced last year). That will cause the price to go up.
But since the price did go up, if one OPEC country exceeds their quota during this (artificial) shortage, they can make quite an extra profit. And they can do this sneakily – these countries aren’t know for open, honest governments. And during a shortage, there’s always somebody willing to quietly buy oil on the black market. Or trade for it. Especially if there are international sanctions against that country, the buyer may trade them sanctioned good – and both buyer & seller will want to keep this deal secret.
So the OPEC quotas are often somewhat ‘leaky’, but still enough to affect the price.
One of the interesting phenomena about oil prices vs gas prices at the pump that I’ve noticed anecdotally is the way that pump prices rise almost instantly when oil prices go up. Never mind that the oil was purchased long ago, refined long ago, and likely purchased by the gas station long ago and already sitting in their underground tanks – all at the previous lower prices.
There’s some convoluted bullshit that oil companies use to justify it, yet somehow it never seems to work the same way in reverse – when oil prices fall, the prices at the pump are slow to match that fall. The oil industry even has a term for that scam – they call it “rockets and feathers”. More at the link below.
Thanks for the replies. I have a friend who likes to blame the POTUS for rising fuel prices but not when it falls. I realize it’s an uneducated stance but was wondering if any others agreed. So far, obviously not…Anyone care to offer a percentage that POTUS affects price at the pump?
To build on the excellent responses already provided:
Another factor, particularly for the price at the pump, is how news items affect the futures prices of oil. Anything that is perceived, by investors and speculators, to possibly have a negative impact on crude oil supply or refining capacity, tends to rapidly drive up the price.
Examples include a hurricane forming in the Gulf of Mexico (which could force crews to temporarily evacuate oil rigs and refineries, and/or damage infrastructure), a major refinery going offline for a repair, bellicose words or actions between nations in the Persian Gulf area, etc.
My understanding is that gas stations typically adjust their pump prices based on what it would cost for them to refill their storage tanks in the current market. When oil prices go up, so does that “refill cost.”
The way I’ve handled these folks is to point out that oil is traded on the world market - including domestic oil. The low prices and energy independence people talk about can only be achieved if we ban export of our our domestic production. So .gov taking away customers from private industry.
In effect taking oil out the free market system.
They’ll usually change the subject in response.
Approximately zero. To 2 decimal places.
Pump prices fluctuate through the week by several cents.
What are those changes in response to, if not market forces … Gallop poll results?