From the price of gas to its impact on our wallets, the cost of filling up has become a focal point of American life. But rather than promoting solutions, the discussion about gas prices often devolves into a game of political finger-pointing.
Many pundits and politicians claim this is an issue of market manipulation, while others blame it on federal regulations.
The real answer is more nuanced and demonstrates how markets and regulations both play important roles in determining the price we pay at the pump.
In this blog post, we’ll explain why America uses less oil now than ever before. We’ll explore why this is good news for consumers and why it matters for everyone whether you drive an eco-friendly hybrid or a gas-guzzling muscle car.
Finally, we’ll look at why gas prices have remained volatile in recent years and what role you can play as a consumer to help make sure you get the best deal possible every time you fill up your tank.
How Did the US End Up with Such High Gas Prices?
Gas prices have risen significantly during the past decade, and they have fluctuated widely since the start of the Great Recession in 2008.
While a few dollars per gallon may seem like a small price to pay for driving to work every day, these high prices are becoming a political flashpoint.
There are many reasons why gas prices have increased so much over the last ten years, but the explanation behind the recent rise in prices is largely tied to the 2008 global financial crisis.
In an effort to protect the American economy, the Federal Reserve lowered interest rates dramatically and engaged in expansive monetary stimulus known as quantitative easing.
This meant that money was much cheaper to borrow and that investors were looking for higher yields in newly-issued securities.
As a result, many investors borrowed money to buy stocks and the prices of oil and other commodities increased dramatically. Oil is a globally traded commodity and it is often priced in US dollars.
This means that as the value of the dollar increased on the world market, the price of oil also increased because it is priced in dollars. This was a major reason why oil prices surged to historic levels during the 2008-2009 price spike.
Understanding the Basics of Oil Markets
It might seem strange that something as simple as a barrel of oil can have such a huge impact on our economy, but the reality is that oil is a critical commodity that is integral to the functioning of our modern society.
A barrel of oil is used in everything from powering our cars to producing the chemicals that make our fertilizer to generate electricity in power plants.
There are many different types of oil fields around the world, and the composition of each barrel of oil is unique. Crude oil is made up of many different hydrocarbons, but no two barrels of oil have exactly the same makeup.
Crude oil is often refined into specific components like butane and ethane, and these in turn are used to create petrochemicals that are used in everything from medicines to fuel.
Why Do We Care About Oil Markets?
Like any other market, the oil market is driven by supply and demand. If people want more of something, they will have to pay more for it.
The price of oil is also highly correlated with the value of the US dollar. This means that when oil prices rise, the value of the dollar will fall.
This can have significant economic consequences. When the price of oil increases, this can have a significant impact on the US economy.
When oil prices rise, the government will receive less revenue from the sale of oil and will earn less from taxes on the profits of oil companies. Inflation can also increase as a result of high oil prices, which can lead to rising interest rates.
The Role of Supply and Demand in Determining Prices
It’s easy to understand why the demand for oil would be an important factor in determining its price. The more we use, the more expensive it is. But why does supply also matter?
When we produce more oil, the price of oil will go down. This is because there is more supply to meet the demand. The demand for oil is largely tied to the economic growth of the world’s population.
Therefore, if the global economy is doing well, the demand for oil will also increase since more people will be buying goods and services that require oil as a raw material.
When the demand for oil goes up, oil-producing companies will try to increase their output to meet the higher demand. If they can’t produce more, the price of oil will increase.
Therefore, the price of oil is tied to the difficulty of producing it, not just the demand for it. If it is easy to extract oil from a particular field, then the price will be low. If it is difficult, the price will be higher.
Why Are Gas Prices So Volatile?
Oil markets are often volatile because of the uncertainty surrounding future supply and demand. If investors believe that the price of oil will increase in the future, then they will buy oil now.
The increase in demand will drive the price up before it has even been produced. When oil markets are volatile, the price of gas will be volatile. While this might seem arbitrary and unpredictable, the factors that drive these price swings are actually very straightforward.
If investors expect oil prices to rise, they will buy oil now before the price goes up. This will increase the demand for oil and will therefore drive the price up.
If the price of oil is expected to fall, investors will sell their oil now before the price drops. This will decrease the demand for oil and will cause the price to decrease as well.
A Brief History of US Oil and Gas Regulations
There is a long history of US government involvement in the energy sector. The government has played an important role in shaping energy markets by providing subsidies to certain industries and introducing regulations that affect the price of energy.
The industry has changed significantly over time, reflecting shifting government policy. The advent of new drilling technologies made it possible to extract natural gas from shale formations in the United States.
Many of the changes in the industry were driven by changes in government policy that altered the way oil and gas producers were allowed to do business.
The discovery of massive reserves of shale gas in the US has transformed the energy sector given that natural gas is now the main source of fuel for generating electricity.
The Determinants of Gas Prices
While the price of oil is often a critical factor in determining gas prices, there are other factors that can affect the price we pay at the pump.
These include the cost of refining and distributing the oil, the impact of federal and state taxes, and speculation about the future price of oil.
When the price of oil is high, oil companies will want to pass the cost of production on to consumers in the form of higher prices.
They do this to keep their profit margins high and to make sure they can keep operating. They will also want to make sure they have enough money on hand to handle unexpected expenses.
Why Does the US Use So Much Oil?
While the US is currently the largest producer of oil in the world, it is also the top importer of crude oil. This means that while the US produces a lot of oil, it also relies on other countries to provide us with the oil we need.
The US imports crude oil because a lot of shale formations have very low-quality oil. This oil is not desirable for most refineries and is therefore not worth trying to produce.
The US is also a very large country with a lot of people. This means that, even though it is producing a lot of oil, there are still significant demands for gasoline and other refined products.
Conclusions
Gasoline is one of the most critical fuels used in the United States. The amount of gasoline consumed has increased significantly over the past decade, with demand for gasoline rising from under 16 million barrels per day in 2005 to over 19 million barrels per day in 2017.
Oil is a global commodity, and the US is heavily dependent on imported crude oil. While the US is the largest producer of crude oil among the Organization of the Petroleum Exporting Countries (OPEC) countries, it is also the top importer of crude oil.
Gasoline is used primarily for transportation and accounts for almost 90% of all crude oil consumption in the United States.
Demand for gasoline and other liquid fuels such as diesel and heating oil is largely driven by economic growth, population growth and the continued substitution of natural gas, biofuels and electric energy.
