Why do gasoline prices fluctuate?
Retail gasoline prices are mainly affected by crude oil prices and the level of gasoline supply relative to gasoline demand. Strong and increasing demand for gasoline and other petroleum products in the United States and the rest of the world can place intense pressure on available supplies.
Gasoline prices generally follow crude oil prices.
Gasoline prices tend to increase when the available supply of gasoline decreases relative to real or expected gasoline demand or consumption. Gasoline prices can change rapidly if something disrupts crude oil supplies, refinery operations, or gasoline pipeline deliveries. Even when crude oil prices are stable, gasoline prices fluctuate because of seasonal changes in demand and in gasoline specifications.
Crude oil and gasoline prices reached record levels in 2008
World crude oil prices reached record levels in 2008 as a result of high worldwide oil demand relative to supply. Significant growth in demand in China, the Middle East, and Latin America, combined with market uncertainty in world supply, contributed to the run-up in oil prices and, in turn, to record-high gasoline prices in the United States.
Seasonal demand and specifications for gasoline
Historically, retail gasoline prices tend to gradually rise in the spring and peak in late summer when people drive more frequently. Gasoline prices are generally lower in winter months. Gasoline specifications and formulations also change seasonally. Environmental regulations require that gasoline sold in the summer be less prone to evaporate during warm weather. This requirement means that refiners must replace cheaper but more evaporative gasoline components with less evaporative but more expensive components. In 2000 through 2019, the average monthly price of U.S. retail regular-grade gasoline in August was about 35 cents per gallon higher than the average price in January.
Gasoline inventories provide a cushion
The supply of gasoline is largely driven by crude oil supply and refining, imports of gasoline, and gasoline inventories (stocks). Stocks are the cushion between major short-term supply and demand imbalances, and stock levels can have a significant impact on gasoline prices.
If refinery or pipeline problems or reductions in imports cause unexpected declines in supply, gasoline stocks may drop rapidly. This drop in inventories may cause wholesalers to bid higher for available supply over concern that future supplies may not be adequate.
Imbalances may also occur when a region changes from one gasoline formulation to another, and refiners, distributors, and marketers adjust supply for the new product.
Last updated: August 19, 2020
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