What Drives Gas Prices?
Founder and President, Armstrong Advisory Group
It can be frustrating to watch gas prices constantly change. Who can forget the price of taking the family on a road trip during the summer of 2008? That year, the average cost of a gallon of gas topped off at $4.111. However, long trips on the road have been less likely to break the bank in recent years. Today, AAA calculates the average cost of a gallon of gas to be $2.142. Although the pain at the pump has lessened, a lot of people worry that prices will go up again. Because of the volatility, many of my listeners ask me about the factors that drive gas prices.
Gas prices are affected by a few different factors. For the most part, these factors fall under the categories of supply and demand3. From a supply viewpoint, factors range from geopolitical problems to weather-related events4. Gas is derived from crude oil, which is generated in parts of the world where geopolitical issues are common. For example, whenever uncertainty crops up in the Middle East, the world’s oil pri
ces can experience more volatility. However, more crude oil is being produced in the U.S. than ever before. Oil production at home has doubled over the last few years3. This trend will probably continue if President-elect Trump increases domestic oil production5.
The impact of OPEC
Another supply factor is the influence of OPEC, a group of 14 countries that produce about 40% of the world’s crude oil6. Their aim is to manage oil production and maintain targeted prices6, but its members regularly fail to come to basic agreements. Recently, these countries fought over a plan to lower oil production levels for the first time in 8 years. Although an agreement was finally reached in this year8, their earlier fights caused oil prices to drop sharply. Unfortunately, economists expect prices to go up as output goes down. These events show that decisions made in distant places can have an impact on life here at home.
Weather-related events can also influence the crude oil supply. As most folks can probably recall, Hurricane Katrina inflicted a great deal of damage to oil production efforts in the U.S. when it struck the Gulf Coast in 2005. The price of crude oil ultimately shot up to $70 a barrel. When President George W. Bush decided to tap into the nation’s Strategic Petroleum Reserve to the tune of 30 million gallons, the price dropped9. However, the impact of weather-related events on oil prices is not as big as the impact of geopolitical problems. The price of oil usually stabilizes once issues caused by the weather are cleared up4.
A factor that also drives the price of gas is demand. This is mostly influenced by the economic strength of oil consumers. If wages are strong and consumers have greater amounts of money to spend, they are more likely to take that road trip and require more gas for their vehicles. When a nation’s economy is weak, many consumers stay closer to home during peak travel seasons in order to save some money. In a situation like this, demand for gas would probably remain low. This problem is currently unfolding in Europe and many developing countries3.
Tracking gas prices
If you would like to track gas price trends, keep a close eye on the news. Because of the impact that gas prices have on our economy, I discuss this topic a great deal on The Financial Exchange Show. Gas prices impact both businesses and people, from the large company that uses trucks to ship products to the family trying to plan the next road trip. I hope that increased more knowledge about all of these factors will lead to more understanding of the factors that influence every area of our economy.
Barry Armstrong has 30+ years of experience in the financial industry. He founded the Armstrong Advisory Group in 2004 and has been sharing his financial knowledge with New Englanders on a daily basis during his Boston-based radio broadcast for nearly 20 years. Learn more about Barry and the Armstrong Advisory Group at www.armstrongadvisory.com. Securities offered through Securities America, Inc. Member FINRA/SIPC and Advisory Services offered through Securities America Advisors. Barry Armstrong, Representative. Representatives of Securities America do not offer tax advice. Always seek the assistance of a tax professional familiar with the laws in your state. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment. Armstrong Advisory Group and Securities America are unaffiliated.