The cost of filling your car’s gas tank is rising again. With crude oil prices rising rapidly, prices at the pump could exceed 2009 highs.
Why are gas prices entering record territory again? There are economic reasons, of course, such as falling surpluses and falling dollar. Cold weather also plays an important role.
If consumers got cheap energy in 2009, the trend for 2010 could be upward.
How is the price of gas decided?
Crude oil is the first component. Add to that taxes, refining, marketing and distribution costs for gasoline to get a final pump price.
Demand is growing around the world, particularly in China, and this is having an effect on crude oil prices.
Political instability and bad weather can limit supply. The same goes for other production disruptions, such as refinery accidents.
In the long run, higher crude oil prices always lead to higher prices at the pump. But this takes some time because most oil is sold under long-term contracts, which are a bit different from the “spot” prices you see in the news.
Why can prices vary from state to state?
The biggest difference between the states is the state tax. Some states, like California, have a unique blend that can only be produced by a limited number of refiners. This makes the price more dependent on interruptions in supply or spikes in demand.
If you were to correct current record gasoline prices for inflation, they would lose some of their drama. And compared to many other developed nations, prices in the United States are still very affordable. Perhaps that’s why American automakers never felt the pressure to build fuel-efficient engines.
Are the gas companies benefiting?
Some consumers are always pointing fingers at the big oil companies. Are they making illegal deals with each other to keep prices up? Over the years numerous government investigations have never found any evidence of this.
In a free economy, prices are determined by the laws of supply and demand. But since demand is relatively insensitive to price changes, this mechanism does not work very well and gasoline prices are always very volatile. Even when gas is expensive, you still drive to work, don’t you?
So what can you do?
You should do a little research when shopping for a new car. Gas mileage is a big deal these days and the effect on the cost of owning your car for many years can be quite impressive.