Why Do Gas And Oil Prices Seem To Go Up And Down? How Does Production Impact Fuel Price Changes?

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The Mystery of the Cost of Gas

The price of gas is all over the place. One day it is $3.40 a gallon and the next it is $3.99. Over a month it can double in price. A few months later it falls down in price just as quickly. The news mentions natural disasters, politics, bomb threats, regulation, oil spills, and whatever else is trendy. The truth of the matter is that it is a commodity that is traded on a global scale. Let's explore what that means and what my theory is to why the price of gas spikes periodically.

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How Gas Is Produced

Gas starts out as crude oil. This oil is buried miles underground. The oil is pumped out of the ground. This is known as crude oil. Crude oil is then refined and made into petroleum gas, naptha, gasoline, kerosene, diesel distillate, fuel oil, lubricating oil, and other residuals. It is used in solvents, plastics, fuels, paints, feedstock, asphalt, and fertilizers. Each barrel of oil can produce 19.2 gallons of gasoline. Gas is made into different octanes and also processed for each state so that it meets that state's fuel economy and clean air standards. Once this is done, the finished product is shipped out.

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Where Does Oil Come From?

The United States both imports and exports oil and refined oil products. As of March 2012, the United States is the world's third largest oil producing country. As of 2008, the United States exported around 19,000 barrels of crude oil a day. This oil is mostly sent to Canada to be refined and then brought back into the United States as a finished product. The United States also exports over 1 millions barrels a day of refined products. The United States uses more oil than it produces. It makes up this difference by importing crude oil from other countries. Most of the additional oil that is imported comes from Canada.

Top 10 Oil Producing Countries

According to the EIA, these are the top ten oil producing countries as of July 2014, in order:

  1. Saudi Arabia
  2. The United States
  3. Russia
  4. China
  5. Canada
  6. Iran
  7. The United Arab Emirates
  8. Iraq
  9. Mexico
  10. Kuwait

Top 10 U.S. Oil Importers

According to the U.S. Energy Information Administration, as of March 2012, these are the top ten countries from which the United States imports oil:

  1. Canada
  2. Saudi Arabia
  3. Mexico
  4. Venezuela
  5. Nigeria
  6. Colombia
  7. Iraq
  8. Ecuador
  9. Angola
  10. Russia

Components Of Gas Prices

The drilling, processing, and transportation all play into the price of gasoline. Other things that go into gas prices are taxes, price of crude oil, labor to make different mixes for different parts of the country, supply and demand, natural and political disasters, public worry and concern, price of crude oil, the deficit, refinery capacity, the futures markets, and problems in other countries. All of these factors have to be looked at when prices of gasoline go up or down. Another complication is that one also has to consider inflation. $3.99 in 1970 is a lot different from $3.99 now in 2012. If the gas prices in 1981 are adjusted for inflation, they become $3.11 a gallon!

Blog is no longer posted, but I still want to share the data
Blog is no longer posted, but I still want to share the data | Source
Blog no longer posted but I still wanted to share the data.
Blog no longer posted but I still wanted to share the data. | Source

Interesting Facts About Gas Prices

  • United States oil production has no effect on gas prices. Sometimes the U.S. increases production and prices go up. Other times, the prices go down. The same with decreases in production. See the charts to the right from Blog of the Century by Benjamin Landy. The article is no longer posted, but the data is still interesting.
  • In mid-2008 oil costs soared to nearly $150/barrel. Gas prices were close to $4.00/gallon. Currently, on march 29, 2012, Wolfram|Alpha has a barrel of oil costing $105. Gas is almost $4.00/gallon. The gas prices are nearly the same as 2008 even though oil is now $44/barrel less!
  • Oil production has increased while Obama has been in office.
  • While gas prices have spiked, reaching record highs, both U.S. and world oil use are down. Increasing fuel efficiency in cars, record high gas prices, an emphasis on local business and farming, and a weak economy have all decreased U.S. demand for oil. The 2011 Japan earthquake and tsunami wiped out Japan's infrastructure and further decreased the world's appetite for oil. Despite this, prices are UP.
  • In 2005, the United States imported 60% of its oil. In 2010 this number was down to 45%. This change was do to both an increase in oil production and a decrease in oil consumption.

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The Bread And Milk Theory To Gas Prices

U.S. oil production doesn't impact gas prices, U.S. gas usage only has a slight impact on gas prices, oil prices don't even always seem to matter. Based on this information, what is a reasonable explanation?

Let me start with a story that isn't gas related. Every time there is a big winter storm predicted, stores around here get mobbed. Everyone runs out to refill prescriptions, buy bottled water, flashlights, batteries, milk, diapers, toilet paper... the basic necessities of life. 99% of the time a winter storm means 3" of snow. There may be some snarled roads for a while but it is a rare case when the weather closes stores for days on end. People don't necessarily need to go on a store raid, but it makes them feel secure. It also has the added benefit that if disaster were to occur, the people who stockpiles would be ready. They could use their water and toilet paper happily or even barter it to get other needed supplies that they forgot about. Supplies bring peace of mind, necessary items in an emergency, and possibly a workable currency to use in an emergency. This mad rush is always made much worse when every radio and television station are broadcasting the eminent doom of the city from the white death.

You may have noticed that gas prices go up whenever there is a natural disaster (think hurricane Katrina), fear of a horrid storm in an area that produces or refines oil, concerns of political unrest, or another national or international news headline bonanza. These fears often never come to pass or will affect only a small portion of oil production or refining. So, why do they significantly raise gas prices?

Think back to my snowstorm example. Individuals react to news headlines by hoarding supplies for possible use or barter. Companies handle themselves in a similar manner.

Where individuals need bottled water and diapers, companies need fuel to move or produce goods. When a company hears that there may be any possibility of a fuel shortage or significant raise in fuel costs, that company will react by stockpiling. For example, an airline hears that there may be a war between Iran and Israel. This war can possibly disrupt oil supplies from the Middle East. The Middle East contains the world's second largest producer and the United State's second largest importer of oil, Saudi Arabia. If Saudi Arabia is unable to distribute oil, oil prices will go up and there is a possibility of an oil shortage. The airline will either have to cope with the risk of higher fairs and reduced flights or the airline can take another route: stockpile. While prices are low, the airline will purchase contracts to oil and gasoline. A contract (the future's market) guarantees that that airline owns the oil as soon as it is pumped out of the ground. Buying lots of oil BEFORE an oil or gas crisis allows the airline to feel secure and ensures that they buy the fuel at a lower price than they expect it to be in the future. If the prices go up substantially or the supply dwindles, the airline can also choose to sell the oil to make a profit which can then be used in other areas of the company. In other words, when the media sounds a panic alarm, companies buy up oil whether they need it or not. This lowers the supply of fuel, raises demand, and raises the prices of the fuel. This in turn leads to other places thinking that oil would be a good investment as prices are increasing rapidly. Speculators will jump in thinking they can make a quick buck. This decreases the supply and raises demand even further. Also, as gas price increases often go up in tandem with inflation (prices go up as high oil prices means things cost more to produce) investors will often buy oil futures as a way to offset the negative effects of inflation. Prices go up even further.

In other words, social and media panic causes companies to buy staples for use or trade and thus raises the cost of gas. Companies buy oil and gas where individuals focus on milk, water, toilet paper, and diapers.

In Conclusion

I believe that gas prices go up for the same reasons that stores have bare shelves before a storm. This does not mean I favor one political party's view or the other. I see this as a non-political issue. There are plenty of political arguments that we could get into, but, those are for another hub. I just wanted to present an alternate view to why gas prices fluctuate and provide you with something for your brain to mull over.

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Comments 12 comments

Larry Wall 4 years ago

Very interesting and I am pretty much in agreement. I will only make a couple of points.

1. We export oil to Canada, because in some cases oil produced in the northern part of the country is closer to a Canadian refinery than a U.S. refinery. It is a matter of convenience.

2. Using Hurricane Katrina to explain spikes in gasoline prices is not the best example. After Katrina, several of the major refineries in Louisiana were out of business because of flooding and damage, Secondly, the Colonial Pipeline was closed down. This is the main products transportation line in the country. So getting gasoline to the markets along the Gulf Coast and up the east coast became a problem. We had to import gasoline to meet the demand. When Hurricane Rita hit a month later, the mouth of the Mississippi River was closed to traffice, including barges and takenrs that deliver crude oil from offshore and foreign countries. That was when the oil companies asked to borrow oil from the Strategic Petroleum Reserves. The borrowed oil allowed the refineries to operate and has been replace.

At the time of Katrina and Rita I was the Director of Public Affairs for the Louisiana Mid-Continent Oil and Gas Association, a trade group that represents all oil and gas activities in the state and the Gulf. I am no longer with the Association. After 22 years of service, my position was eliminated at the end of 2010.

3. You are correct when you state that the amount of oil the U.S. produces has little impact on the price of oil and ultimately the price of gasoline. That is because as long as we are dependent upon foreign sources for our crude, and I would put that number at anything over 10 percent, we are going to be paying the global price.

4. Most state have laws that prohibit the raising of prices when a named storm enters the Gulf and is headed for a particular state. However, prices go up, because the global price of oil goes up and the U.S. government cannot do anything about that. It is the speculators that push the price up. Actually, after Katrina, gasoline prices should had been higher than they were.

I have written several hubs on this subject in the past month or so. That is one flaw with Hub Pages, nothing is dated, except the comments. Therefore, I do not know when you wrote yours.

Basically, we are approaching the issue in the same manner. You have done some excellent research. I am voting this up, useful and interesting.


Lwelch profile image

Lwelch 4 years ago from USA Author

Larry,

Thank you so much for the well thought out comments and thoughts. You make some very valid points. I had thought of the refineries closing but hadn't thought about the fact that it complicates my example, and it does. The bread and milk theory only works with Katrina when the storm was in its infancy and not once the refineries closed. I need to think of an "almost disaster" that caused a fuel drive but in the end was an unnecessary fuel drive.

I have heard that at one point a number of years ago Saudi Arabia actually confronted the current president and warned that speculators were going to make prices sore. I would love to have more information on that. I think that if that was the prediction, that it indeed has come to fruition. My old job gave me a chance to meet people from all over. One guy came in who was from Saudi Arabia and was currently studying stateside. Gas there is something like .75/gallon. The big differences: Well for one they own the oil, but obviously they aren't paying market value for it. This I think is explained by the fact that (I believe) the government controls the oil much as England used to own all of the coal mines. I can see some merit to having the government regulate and own infrastructure. I can also see downsides as I know that the open market has some good effects. It's a shame that we can't look into an alternate reality bubble and see the outcomes of the different methods years from now!

It must have been very interesting working in the oil sector. You had a chance to understand dynamics that most of us can't even imagine.

The one question I don't understand that I need to study more is: how do the speculators drive what oil producers receive for their oil? Does a country sell the oil to a market and then the market has the speculation or are the traders buying directly from the source?

So many little things at play here. Thanks for your thoughts!

~Lena


Larry Wall 4 years ago

Lena:

As you obviously know, the oil and gas industry is a lot more complicated than people think.

First, gasoline prices in Saudi Arabia, Kuwait, Venezuela and other OPEC members, where the oil industry is nationalized, the gasoline prices are lower because the government subsidizes the prices so that the citizens can enjoy low prices and read about how the greedy Americans are charges higher amounts. This has been an on going issue for years. When I worked at my last job, I published a little booklet (this is before the internet) called Oil and Gas Facts. The Saudi Arabia prices were always under the $1 mark.

You are right the Saudis are not paying market value, they are just using their own oil, kind of like taking water out of the stream for your personal use.

Your second question about Speculators is an important question. Speculators do not buy oil. They buy oil futures, i.e., paper that promises delivery of oil from Point A to Point B on a certain date. That paper may be sold or traded five or six times before the actual oil is delivered. In recent years the speculators have been making money. Sometimes, they get caught short, because when they buy the oil (paper) they are betting the oil will be at a certain price when it is delivered. If the price is more that what they predicted they make money.

If the price is lower than what they anticipated, they (the last person holding the paper) loses money.

Speculators respond to anything. If a pipeline explodes in Texas, there will be a bump in oil prices. If a bomb explodes in the Middle East there will be a bump.

Speculators are playing the futures market. There are oil speculators, wheat speculators, corn, rice, etc. Oil is a commodity and it is sold like any other commodity.

You asked does a county sell the oil to a market and then the market has the speculation or are the traders buying directly from the source. The answer is yes, no and maybe.

Oil availability is posted at market centers, Oklahoma, NYMEX, the St. James Terminal in Louisiana and other places around the world. The speculators bid on the future delivery of that oil.

For example, the United States does not buy any oil. Oil companies operating in the United States buy oil.

Venezuela, Saudi Arabia et al sell oil as a country, they may have a nationalized oil company, but it is the same as the country selling it. So today, it is a seller's market. The demand apparently exceeds supply.

If oil consumption decreases because gasoline prices get to high, the Saudis will lower the price, to keep their market share and the other OPEC members will follow suit. It has happened before and will happen again. We have just not cut back like we did four years ago when the Stock Market crashed. Also, all the talk then about alternative fuels and related ideas did not materialize. Then there was the BP oil spill, which has reduced offshore production in the United States, thus putting some stress on the supply and raising the price.

Probably gave you more information than you wanted.

Sometimes there are conditions that really cannot be explained. After Katrina, there was a major shortage of gasoline in Atlanta, GA. I suspect some bulk plant was holding back, but it was never proved.

Finally, for the record, when the Strategic Petroleum Reserve was first proposed, the government did buy oil, domestic and foreign, when the price was very low.

I hope this answer your questions. It is refreshing to exchange comments with someone who has an understanding of the industry.

When I started writing for Hub Pages my intent was to write about anything except oil and gas. However, so much misinformation was being poured out, I had to jump in and offer some effort at getting the facts out. Being that I lost my job, gives me some credibility. No one can accuse me of being the PR spokesman for the industry. I do not have that job any longer. However, I do not have an ax to grind. I think it is a very good industry and if given the chance would work for it again.


Lwelch profile image

Lwelch 4 years ago from USA Author

Thanks for the reply! I love information so too much rarely exists when I am engrossed in a topic!


Dennis AuBuchon profile image

Dennis AuBuchon 4 years ago

great hub. The information you have presented was well worth the read. I voted up, pinned it and tweeted.


Lwelch profile image

Lwelch 4 years ago from USA Author

Thanks! I am glad to hear comments. It lets me know that my theory makes sense to someone other than me! I appreciate the comment and the sharing of my hub.


HSchneider 4 years ago from Parsippany, New Jersey

Great information, LWelch. There is too much mis-information and demagoguery on this issue. Those who proclaim that increased American drilling will solve our problems are just plain lying. It is a drop in the bucket. We need much more alternative renewable energy sources. Oil and gas will run out so we must protect our future as well as our environment.


Larry Wall 4 years ago

Lena as I said before you wrote an excellent Hub. However, since writing that hub, domestic oil and gas production from shale formations have skyrocketed and give all indications of staying healthy for the future. The price of gasoline is going to fluctuate because of seasonal changes in formulations, summer to winter, refinery down time because of maintenance, speculation and demand. I am not opposed to alternative energy forms, but for transportation purpose, I think the nation is going to have to agree on natural gas or electricity. Both have pluses and minuses. However, if we do not agree, the cost of cars will increase as automakers will be required to make fewer units of more kinds of cars. Thus, what you save in energy, you will spend on the vehicle. Gasoline, natural gas, electric, ethanol, nitrogen and who knows what else may all work, but are they going to be available to everyone everywhere. If we have to build a separate infrastructure for each, the price of fuel will go up.


Lwelch profile image

Lwelch 4 years ago from USA Author

Larry, I had not thought about the prices due to different fuel sources. i guess I could see that.

I read once that natural gas cars are fairly common in Utah. Is that urban folklore or is that true? Do you know?


ceh4702 profile image

ceh4702 3 years ago

One important factor in the price of gasoline is the current value of the dollar. When the price of gold escalates, what is really happening is the value of the dollar is falling. This means you have to spend more dollars to buy a barrel of oil. Monetary Policy can destroy the Oil Market.

One more problem is social engineering. By this, I mean how the EPA and state EPA regulations try to micro manage gasoline and require specific blends. This creates possibly hundreds of micro-economic markets for gasoline blends. So when one refinery goes down, it causes a critical shortage of the blend you need as mandated by the stupid backwards EPA.

Both the EPA, and the Monetary Policy, are run by the Government. The government can be our worst enemy.

Other things can cause problems. It has been rumored that some countries like Iran purposely cause problems just to make their price of oil increase.


Lwelch profile image

Lwelch 3 years ago from USA Author

Awesome comments and great thoughts. I do know that many countries (not here) in the middle east (think Saudia Arabia) subsidize their oil prices so that they can sell it for .75/gallon (or so said a customer of mine who was a student living here for college).

The state environmental variances are a big pain as well as the federal EPA as each state is different. This becomes a problem when things shut down refineries as one refinery may only mix gasoline for a few states. We loose that one we are more impacted than we would if all states had the same emissions mixes.

After playing NSDM (National Strategic Decision Making Games), a game that simulates real world politics and government role plays of what ifs, I can say I bet that there are countries manipulating the market. When it comes to politics it is all about money and power. I have found strange and scary solutions in that game to meet my objectives. If I were playing a role that would benefit by manipulating oil prices in the world market I would do it without hesitation if it benefitted me.

Thanks for some out of the box thinking!


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SkeetyD 3 years ago from Barbados

Very informative and interesting hub. I found the Top 10 U.S. Oil Importers particularly noteworthy. I had no idea most of those countries exported oil.

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