THE BLOG
04/11/2013 02:39 pm ET | Updated Jun 11, 2013

The Crude Oil Guessing Game: What's Really Driving Gasoline Prices Up?

AP

The Energy Information Agency recently revealed that the current average cost of gasoline in the states is $3.78 per gallon, 45 cents higher than it was at the start of 2013.  While there have been instances of higher gas prices in the past, this fact does little to dispel complaints from today's cash-strapped drivers.

With gasoline prices continually yo-yo-ing, to some it may seem there is no formula in place to determine the amount charged. Understandably, it is easily (but incorrectly) assumed that convenience stores simply charge whatever they like, only considering the prices offered at competing pumps when setting their own.

Many cite the U.S. economy and the decreasing value of the dollar as being reasons for the recent rise in gas prices. While this can influence the amount charged for gas in the long-term, this factor does little to explain the constant peaks and troughs. Others blame the gas price surge on the government and Obama's push for 'radical environmentalism' (which could see a carbon emission tax implemented nationwide), but in reality the government has very little control when it comes to fuel prices.

What really determines gas prices?

The price of gasoline is largely dependent on one factor: the trade cost of its main ingredient, crude oil. The price of crude oil accounts for around 72 percent of the cost of gasoline, the other 28 percent dependent on distribution and refining costs as well as applied taxes.

The crude oil market influences the fuel buying decisions of millions of individuals across the globe. As a result, this makes it incredibly difficult for the government to control the amount charged for oil drums, and in turn gasoline. Theoretically, the government could implement a U.S.-wide limit on the trade price of crude oil, but this would more than likely have a negative knock-on effect on the country's import and export oil markets (not to mention the import markets of those countries sourcing the majority of their crude oil from America).

The crude oil guessing game, aka 'futures contracts'

Crude oil prices fluctuate daily worldwide, a reflection of the current supply and demand. However, oil prices are primarily controlled by 'futures contracts', which see oil traded at a rate in line with what investors think it will be worth in the future.

Consider an auction house: any item up for sale is only worth as much as those in attendance are willing to bid for it. In this way we can understand how brokers can bring about a self-fulfilling prophecy when they predict high trade value as they attempt to outbid their rivals to acquire oil assets.

Economy experts believe crude oil prices will surge this summer due to an increasing demand for gasoline typically seen during the season annually (the explanation for this being that less people hide away indoors when the sun is beaming). Additionally, it is thought this summer's fuel demand will be even greater than in recent years, with more people acquiring cars as the global economy continues to recover from recession. It should also be noted that summer weight gasoline is more expensive than the winter variant already since it contains anti-smog oxygenators such as ethanol.

This could explain 2013's premature price increase, but, as this article has already established, the entire market for oil is essentially based on speculation. However, the somewhat-informed hearsay above will likely be enough to see plenty of bidding, lifting the resulting value of crude oil and subsequently also that of gas.

Is there a solution to this oil-meets-gasoline price headache?

Frankly -- no, not really. In fact, the oil market is likely to become even more baffling -- and expensive -- as time goes on and the world's supplies become depleted and demand harder to meet as a result.

Drivers may, however, be able to decrease their own gas consumption in order to save money. Buying a car with fuel-saving technology -- or, even better, an electric one -- will see much cash saved. Other options include leaving the car at home, walking or using public transport instead.

This would see the demand for gasoline drop on a significant scale, and oil trade prices would eventually fall in line with these. Ironically, however, the resulting decreased cost per gallon could encourage many to 'fill up' prematurely, pushing the prices of oil futures contracts back up once more. The cycle really is endless!