I set a lot of goals for myself when I was younger and one of them was to purchase a car the moment I turned 16 with a drivers license in hand. While I was lucky enough for my parents to cover the insurance, as I was still on their policy, they made me pay for my own gas. I had no problem doing this, because I knew if I was driving the car I should be responsible for making sure it had gas.
In 1997, the average gas price across the US was around $1.44 per gallon. I had a small Honda Civic that I had around a 13 gallon gas tank. That meant it was costing me a little under $20 to fill up. Fast forward to today, and that little 13 gallon car would be costing around $45 to fill. While some of this is due to inflation, gas prices have done nothing but make a steady climb up since the day I turned 16. Yes, we have seen some dips, but the overall trend has been in the opposite direction than most of us would hope for.
Why Do Gas Prices Rise or Fall
Gas prices will rise or fall in direct correlation to the price of crude oil. If you look back to 2008, people were finding ways to cut back on the amount that they were driving since the economy went bad. Because of this decrease in demand, the price of gasoline also started to fall. While the rest of our finances were hurting, we were at least paying a little bit less to fill up our cars.
How is the Price of Crude Oil Determined
Now that we understand that gas prices are related to the price of crude oil, we need to figure out what drives the price of crude in either direction. Prices are set daily based off buyers and sellers of physical and futures contracts. Demand is not the only factor that will move prices. Geopolitical events also play a huge role. Usually geopolitical events will spark fear into the economy, causing the price of crude to spike higher. An example of this would be if a large oil producing nation (such as Venezuela) decides that they are going to limit the amount of oil they export to the United States.
Why Gas Prices Rise More Than They Fall
There are a lot of conspiracies on why it seems that gas goes up much faster than it falls and the most widely heard one is because of price gouging by gas station owners. I tend to be more of a believer of Ohio State University economist Matt Lewis who says that when prices start to fall consumers are so relieved that they quit being as proactive about finding the cheapest gas station. This allows station owners to drop prices at a much slower rate to get as much profit as possible.
One of my favorite websites to visit is GasBuddy.com because it will track the gas stations in my area and tell me what they are selling each grade of gas for. In the beginning of 2008, when gas prices were going up, the web traffic to Gas Buddy was also steadily rising. However, once the price of gas started to go down later that year the web traffic also subsided.
Because the price of gas started to decrease people were not as interested in shopping around anymore. This meant that gas stations could make the drop a little bit slower than the events that has caused it to spike in the first place. Here in Denver, we have such huge price fluctuations that I am always checking the prices of gas. On one side of downtown the price could be $0.15 higher than the price at a gas station on the other side.
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