Gasoline prices in the U.S. have been rising the last few months, sparking media attention and resulting in commentators and policymakers struggling to understand and explain the latest market developments.
I thought of this challenge recently as I read a piece in The Washington Post entitled “Gas prices are on a mysterious climb.”
The story contained a lot of detail and useful information, but I had a problem with the headline. The issue is complex, but it is not a complete mystery.
I’ve touched on the general basics of gasoline prices before and those points still hold. Crude oil is the single-largest factor in determining the price at the pump in the U.S. The price for crude oil, meanwhile, is set in worldwide markets where many buyers and sellers react to market fundamentals, including assessments of current and future supply and demand factors.
Factors behind the recent price rise
At times, there are easy-to-understand explanations for big swings in prices. In 2005, for instance, Hurricanes Katrina and Rita knocked out production and refining in the Gulf of Mexico, reducing supplies and leading to price increases. In 2008, the financial crisis and recession that followed had the opposite effect, slashing demand for crude oil and sending gasoline prices plummeting.
This time around, there appear to be a combination of factors at play that help explain the increase in the price of crude oil since December. And there are issues specific to the domestic gasoline market that further explain why pump prices have headed up in the U.S.
Among those factors cited by the Energy Information Administration, the American Petroleum Institute and other analysts and journalists in recent weeks are:
- Strong worldwide demand for crude as the global economy improves
- Declining crude production by a number of major producing nations
- Rising demand for gasoline globally
- Industry refinery outages in the U.S. and in Europe
- Higher gasoline “crack spreads” reflecting tight high-octane supplies
- The United States’ “quantitative easing” monetary policy contributing to a weak dollar
- Geopolitical uncertainty created by a backdrop of political unrest in places like Venezuela and the Middle East
- An increase in the cost of corn-based ethanol, which by law must be blended into U.S. fuel supplies
No one simple explanation
The best explanation for what is contributing to the recent rise in U.S. gasoline prices is probably a combination of all of the above. No single issue has a dramatic impact on prices by itself, but added together they appear to be ratcheting the pressure on prices upward.
Price fluctuations are a normal reaction to the multiple signals about supply and demand fundamentals in free markets, which each day work to meet the needs of consumers and help to efficiently optimize the value of supplies across the economy.
Examining the myriad factors that are shaping today’s prices shows the current environment to be a bit more complicated than a hurricane. But it’s not a complete mystery.
