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5 Things That Actually Determine the Price of Gasoline

5 Things That Actually Determine the Price of Gasoline
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Written by Brian Merchant

The price of gasoline is one of the most important variables in daily American life. The vast majority of Americans own cars—there are some 240 million of them on the road—and rely on them to commute to work and for general transportation. Whenever gas prices get too high, it can cause an economic shock for hundreds of millions of people. So whenever those prices show signs of heading towards the $4 a gallon mark, a mild panic ensues. Typically, it arises from the genuine concern of ordinary citizens, and then is promptly fanned into something resembling hysteria by opportunistic politicians and pundits.

Exhibit A: Drill, baby, drill.

Republicans take advantage of the gas anxiety to claim that a lack of domestic drilling and too-tough regulations that are causing prices to spike. Specifically, they allege that Obama’s tree-hugging energy policies are preventing oil companies from opening reserves and providing the markets with cheap, American-made oil. This is nonsense, but it plays well with voters. In reality, oil is traded as a commodity on the global marketplace, and its price is prone to wax and wane according to various market forces. In fact, domestic drilling policy is one of the least important factors in today’s price of oil. So let’s take a quick look at what actually determines how much you’re paying at the pump.

1. Global Supply and Demand

This is the biggie. Gasoline prices are tied to oil prices, and oil consumption is booming, especially in places like China, India, and Brazil. It’s not relenting in the U.S., either. But supply remains relatively fixed—new oil discoveries are fewer and far between in modern times, and that which we do find is often harder and more expensive to get. As the commodity grows scarcer on a global level, prices rise. That’s why many experts now believe that the era of cheap oil is over—and that we can expect it to continue to rise in the longterm. As for the short term, Reuters offers a look at how global demand can mess with prices;

Japan, for example, is replacing some of its nuclear energy with oil. Its oil imports appear to be running about twice pre-tsunami levels. In addition, there has been some pick-up in demand from Asia. Note that the IEA forecasts oil consumption to rise 830k this year after a 740k bpd increase last year. The unusually cold European winter is also thought to be boosting demand.

Top photo from taylor.a via flickr; second photo from paul_appleyard via flickr

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Photo from taylor.a via flickr

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123 comments

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9:52AM PDT on Jun 15, 2012

thanks! informative. hopefully soon we will implement other energy sources!

8:02PM PDT on Mar 25, 2012

Thank you!

10:04PM PDT on Mar 18, 2012

Interesting. Thanks for the post.

9:39AM PST on Mar 7, 2012

So the real problem is that it's on the stock market at all. There should be no gambling with people's necessities like food or fuel.

8:51AM PST on Mar 7, 2012

Grazie delle informazioni.

8:06AM PST on Mar 7, 2012

thanks for the fact-based reminders

6:26AM PST on Mar 7, 2012

Interesting article,thank you.

11:37PM PST on Mar 6, 2012

wrong, only #1 GREED

11:08PM PST on Mar 6, 2012

Eddie- excellent post yourself. I don't know much at all about bio-fuels, but it looks like I should investigate. My post was more of an off-topic decleration than a point about this specific article, but I do mean it. We've just gone so far in the wrong direction, God only knows how long it'll take to get us back on track. I hate to lose hope, but eventually, one has to wonder if we even can.

Aleksander L - I honestly thought your post was spam LOL! That was an interesting list of oil prices- they sure as hell ARE uneven!

David A- as always- great post!

A bunch of people aren't buying this- I'm glad to see it. Sure, there is some truth, as I said before, but there is always more to it than us pions will ever really know. And it usually comes down to greed &/or power!

10:20PM PST on Mar 6, 2012

Was reading this awesome post, then started to send a star, and noticed it was
Robby C. Again, so due to the shortage of stars I can't send you any more this week. Sorry. Good Post though!

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