If you're like the average consumer, you notice when gas prices start to rise. The cost of fuel is a political issue, which the oil industry and politicians tend to take the most blame for. Keep reading to learn about the factors that cause gas prices to change in price.
The Retail Price of Gas
If you're wondering why gas prices are rising again, it helps to look at the cost breakdown that makes up the complete retail price. The retail price of gas is comprised of four elements:
- Cost of crude oil (54.8%)
- Refining costs (14%)
- Distribution and marketing costs (14.3%)
- Taxes (17%)
It's possible for all four of these elements to change throughout the year, so fluctuations in gas prices are normal for the most part. Significant changes in gas prices are usually correlated with the cost of crude oil.
The most significant factor shown above is how much crude oil is currently selling for, which can influence gas prices the most acutely. Crude oil is the raw material required to produce gasoline, and according to the U.S. Energy Information Administration, its price accounts for more than half of the total average price of gasoline, as shown in the above data.
Since crude oil tends to fluctuate in price due to environmental and political factors, the costs of fuel also fluctuate. One example is how the price of crude oil declined in 2020 during the COVID-19 pandemic. Crude oil prices went on a sharp uptick following the Russian invasion of Ukraine in 2022.
Fuel Grades
Fuel is priced based on its octane levels. High octane levels make fuel more resistant to combustion, but octane is also expensive. High-octane gasoline is more costly as a result.
The three grades of fuel are:
1. Regular
This type of gasoline is safe for most vehicles. It has the lowest concentration of octane out of the three types available, but the total amount of octane is still fairly high at 87.
2. Midgrade
Midgrade fuel has an octane concentration of around 89-90. A few automobiles are designed to take midgrade fuel, but for most vehicles, this grade is either unnecessary or it contains too little octane for the demands of the engine.
3. Premium
Premium grade fuel has the highest concentration of octane of the three types, with the octane of around 91-94. Automobiles that must take premium fuel are typically luxury vehicles with high-performance engines and larger vehicles with turbocharged engines. You can put premium gas in most cars that run on regular without causing damage to the engine, but most drivers find that the additional octane is hardly worth the price increase.
Crude Oil, Supply and Demand
Crude oil is the primary factor that determines the cost of gas, but supply and demand also have a large influence. The retail price increases when supply decreases, and the retail price will also change if anything happens that disrupts the crude oil supply, refinery operations or gasoline pipeline deliveries.
Crude oil is a global commodity that is one of the most widely used global products, even as the number and size of international oil companies have diminished. The crude oil trade has changed in recent decades with the development of alternative fuel sources, which are beginning to replace crude oil in certain automobiles. The public demand for sustainable fuel sources has led to more opportunities for the crude oil industry to change, and as time passes, the cost of gasoline for older vehicles that require it is expected to increase significantly.
The demand for crude oil is still high around the world, even in developing countries. The issue is that crude oil has various grades, with several being too poor in quality to make gasoline. Some refineries have specific capabilities in terms of what type of crude oil they can process. The refinery's preferred grade will allow for the highest profits.
When refining crude oil into gasoline, it's important for the refiners to consider how:
- Crude oil that is light and has low density produces more gasoline than heavy, high-density crude oil.
- Sweet crude oil has a lower sulfur content, is of a higher quality and is more expensive.
- Sour crude has a high sulfur content and is considered heavier, but it is easier to work with when the refinery has equipment designed to process it.
Seasonal Changes
You might have noticed that gas prices are typically lower at certain times of the year. This might cause you to wonder why gas is going up during the summer or why it seems like your gas bills are lower in the winter. These changes occur every year because the refineries have to adjust their product to seasonal changes that could compromise the quality of the fuel and their earnings.
Even if crude oil prices are stable for the time being, other factors that cause gas prices to temporarily fluctuate are:
1. Seasonal Changes in Demand
The retail price of gasoline tends to increase in the spring, peaking sometime in late summer when more consumers are traveling. The retail price will then decrease in winter, when fewer consumers are on the roads because of the hazardous weather conditions and cold temperatures. Consumer demand has an influence on gas prices, which is why you might notice gas lowering in price when people have a reason to avoid driving or traveling.
2. Gas Specifications
The reason gas specifications tend to change seasonally is related to environmental factors and the resulting gas regulations. Gas designated for sale in summer temperatures has to evaporate more slowly – otherwise, the high temperatures will cause profit losses. Gas specifications help protect the refiners and give consumers like you the best experience at gas stations.
Because of temperature-dependent gas specifications, it's common for the average monthly gas prices to be several cents per gallon higher in summer months than in winter.
3. Gas Formulations
Gas formulations also change seasonally because of environmental regulations. To keep gas from evaporating in the summer heat, the refiners have to replace certain components with more expensive materials that evaporate less readily. This changes the composition of the fuel and makes it more expensive when temperatures are high.
Save on Gas With AAA
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