While supply and demand get the most focus and the most blame , inflation and taxes also play a part in increases in the cost to consumers. The law of supply and demand has a predictable impact on the price of gas. Less predictable are how the supply side and demand side will change over time. Oil does not come out of the ground in the same form everywhere it is discovered. It is graded by its viscosity i. This type of oil is in high demand because it contains fewer impurities and takes less time for refineries to process into gasoline.
As oil gets thicker, or "heavier," it contains more impurities and requires more processing to refine into gasoline. There is a positive correlation between crude oil and gasoline prices. It seems logical there would be a positive correlation between the commodities, especially since gasoline is a product of refining crude oil. As the supply of this preferred oil becomes constrained, the price climbs.
Note that oil supply among large producing nations is regulated by the cartel called OPEC organization of petroleum exporting countries. OPEC's 14 members aim to regulate the supply of oil in order to set the price on the world market. Within OPEC, each member nation is allocated a production quota. International oil companies operate independently of OPEC, but because OPEC controls a larger percentage of world crude oil exports supply not consumed by the producing nation , OPEC's policies impact the price of oil worldwide.
If the demand for a good increases while supply remains constant, the price of that good will rise. The growth in the number of people driving cars and trucks, particularly in parts of the developing world, has expanded dramatically over the last few years. China and India, each with populations in excess of one billion, are experiencing expanding middle classes that will likely drive more cars and use more gasoline over time.
China alone had built more than 80, miles of interprovincial highway by late , and it is continuing to add more than 6, miles a year, according to a Chinese government site. By comparison, the U. Many countries subsidize the retail price of gasoline to encourage industrial development and gain popular support, creating an artificially higher demand for gasoline. Prices help allocate scarce goods. That is, consumers respond to higher prices for any commodity by using less of it. Although demand for gasoline is elastic in the long term, small disparities in supply and demand in either direction will not have a significant impact on prices in the short run.
This inelasticity of demand means if prices go up, demand goes down, but not by very much. The reason is that people are locked into their lifestyles for the near term. While they may change their fuel consumption by buying more fuel-efficient vehicles, moving closer to work, or taking public transportation, they can't or won't do so in response to a temporary hike in prices.
There are several other factors affecting the situation in Europe, such as:. The economic rebound in the wake of the coronavirus pandemic has caused factories to ramp up production, pushing up demand for energy. Europe is also facing increased competition for gas from other parts of the world. In recent decades, demand for gas in some regions like Asia and the Middle East has risen sharply.
This has knock-on effects on the market for liquified natural gas LNG , which makes up about a quarter of Europe's imports. When demand for LNG is high, supplies tend to be diverted to Asia to take advantage of rising prices. In addition, Russia has been expanding its gas exports to China, and in June inaugurated a gas processing plant in the far east of the country, which is predicted to become one of the biggest in the world.
Additional reporting by Kumar Malhotra and Daniele Palumbo. Read more from Reality Check. Send us your questions. Image source, Reuters. Big travel holidays like Thanksgiving or Christmas will spike the prices, while cold or snowy weather that prevents or discourages travel will lower them.
Because OPEC controls so much of the supply, they have a tremendous amount of influence over the price — even if the crude oil is produced here in the United States. If the members of OPEC want global oil prices to go up, they can lower the supply by selling less to the market.
If they want the price of oil to fall lowering profits for their competitors , they can flood the market with oil. Other manufacturers in Canada, Russia, and America can do the same thing, but they have a much smaller effect. Whoever controls the most oil has the strongest ability to manipulate its price. A flare for burning excess methane, or natural gas, from crude oil production is seen at a well pad in Watford City, N.
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