What Causes the Rise and Fall of Gas Prices?

by Sean Bryant on July 19, 2013

Gas PricesI 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.

The weather can also have adverse affects on the price of crude oil. Weather and oil get mentioned a lot together in the summer months because it’s hurricane season. If a storm is threatening drilling operations in the Gulf of Mexico, it could shut down production until the storm passes. Even worse, the storm could damage the oil rig causing it to be down for an even longer period of time. This would send the price of oil higher.

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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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • Whatsoever the prices are going up and some day will cross the horizon for whatever reason it may be geopolitical or weather or lobbying or whatever.

    • Something needs to be done. Here in Colorado we are a little better off than most places. Are prices are below the national average most of the time, but it’s still high.

  • I haven’t used GasBuddy, but I probably should give it a try just to see how much I end up saving. I feel like I personally have such little influence on the price of gas that I rarely pay attention to the fluctuations. I suppose if it got high enough it would eventually force me to make adjustments (like trying to work from home a certain number of days a week), but if it got to that point the price would likely drop from others adjusting as well. Gotta love supply and demand.

    • It’s crazy how much gas prices can fluctuate here in Denver. When we lived in Chicago they were just high everywhere. haha

  • My HB drives and he tries to price check gas prices as much as possible, but man is it expensive!

  • CanadianBudgetBinder

    I check gas prices online and bought a few spare gas tanks. I use online coupons to get cheap gas then fill my tank and then my extra tanks. Prices are getting too expensive $1.34 litre now.

  • Walt@ My Wealth Desire

    I am lucky that I am living in a country that offer the lowest gas price in the world. I found out whatever is the price of crude oil in the international market, the price here is not affected like in the US. I think the last time there is a price increase was 2 or 3 years ago.

  • Gas prices have gone crazy in Australia lately. With high oil prices and a super low Aussie dollar, the price of fuel has gone up about 40c in the last month.

  • myjampackedlife.com

    Gas prices rise and fall due to long weekends, summer holidays and cold winter weather. People need to stop wasting time analyzing it for any other reason and accept that. They can do it, so they do do it. That’s it.

    • Those are all things that definitely affect gas prices, but a lot of other things do to. If countries decided they didn’t want to ship oil to the US any more our gas prices would shoot up because our available supply would be affected.

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