For the average American, budgeting is a must. Aside from budgeting for groceries, rent, and power bills, most Americans also need to pay for gas. Gasoline prices, like other commodities, tend to grow or fall depending on a variety of reasons. But how do gas price changes affect drivers in the U.S.?
If you’re someone who is always on the road for a job or travel, a few pennies in gasoline prices wouldn’t hurt. Unfortunately, the same cannot be true for a sudden surge in gas prices, particularly for those living paycheck to paycheck. Increases in gasoline prices have several ramifications.
But why do gas prices rise and fall, and who controls them? In this reading, we’ll explore how gas price changes affect American drivers and what factors determine fuel costs.
Let’s get started!
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What Determines Gas Prices?
Supply and demand, the cost of crude oil and the refining process, distribution and marketing, and tax rates are the main determinants of gas pricing.
Supply and Demand
The relationship between the number of commodities a producer is willing to sell and the number of commodities a consumer is willing to buy is known as the law of supply and demand in economics.
The law of supply and demand suggests that if there is high demand for a product with limited supply, the product can be sold at a higher price. This means that a crude oil shortfall combined with increased consumer demand for gasoline might drive up gas prices.
Similarly, an increase in oil supply could lower gas prices, as happened in 2014 when the US discovered new shale oil reserves. Also, keep in mind that gas prices can rise due to seasonal demand. Every summer, for example, the demand for fuel rises as more families go on vacation.
Cost of Crude Oil
The most traded commodity in the world is crude oil. The price of crude oil accounted for 56 percent of gas costs in the last decade, according to a survey by the US Energy Information Administration, and plummeted to 43 percent during the epidemic.
Refining Process
Crude oil is refined into gasoline through a process called refining. It is distilled and blended with appropriate additives, which has an impact on the cost of gasoline manufacturing.
Seasonal and regional blending regulations for pollution mitigation, as well as the inclusion of ethanol, all influence production costs. Refining costs accounted for 14% of the average gasoline retail price in the decade leading up to 2020.
Distribution and Marketing
Gasoline is shipped to storage tanks and distributed to gas stations after the refining process, which necessitates staffing and maintenance. From 2010 to 2020, this accounted for 14% of the retail price of gasoline.
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Tax Rates
According to Investopedia, between 2010 and 2020, state and federal taxes contributed to 16 percent of the retail price of gasoline. The federal gasoline tax rates, which comprise excise taxes of 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel, haven’t changed since 1993.
How Do Gas Price Changes Affect American Drivers?
Changes in gas prices directly affect American drivers’ daily lives, influencing everything, including commuting patterns and personal finances. Drivers frequently have to make changes to offset the additional expense as gasoline prices climb.
Increased Transportation Costs
Rising gas prices will greatly affect monthly spending for many who depend on their cars for daily travels. Kelley Blue Book claims that the average driver pays an extra $56 per month for every $1 rise in petrol prices. For individuals who live from check to check, this might be very difficult.
Reduced Driving
Many drivers react to rising gasoline prices by driving less, cutting back on non-essential journeys, choosing public transit (bus, train, or carpooling), and switching to fuel-efficient vehicles; some drivers contemplate hybrid or electric automobiles to help save money.
Impact on Delivery Drivers
Rising gas prices mainly impact rideshare drivers, truckers, and delivery workers. Rising fuel prices affect their income; occasionally, this forces them to raise fares or look for other sources of money.
Higher Costs for Goods & Services
Rising gas prices increase shipping expenses since many companies rely on petroleum for logistics and transportation. This frequently translates into higher grocery, online, and other basic good pricing.
Increased Interest In EVs
Many Americans begin looking at electric cars (EVs) as a cost-cutting substitute as gasoline prices rise. EVs appeal more to budget-conscious consumers since they provide relief from changing fuel prices since they do not need gasoline.
Who Controls Gas Prices?
We’ve established that gas prices are determined by supply and demand, tax rates, crude oil, marketing and distribution, and the refining process. Even still, a prevalent myth regarding high gas prices is that they are controlled by local gas stations or even the president.
However, the Organization of Petroleum Exporting Countries (OPEC) controls the price and supply of crude oil, which accounts for over half of the retail price of gasoline (OPEC). OPEC is a 13-country organization that controls 78 percent of the world’s known oil production.
Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, Algeria, Nigeria, Gabon, Angola, Equatorial Guinea, and Congo are all members of the organization. By supplying less or more crude oil to the global market, the organization essentially controls the price of crude oil.
Countries that are not members of the organization, such as the United States, are still affected by fluctuations in gas prices because they control the majority of the world’s oil supply.
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Why Are Gas Prices Rising?
The price of gasoline in the United States reached its highest level since 2008 in early 2022, and experts anticipate that it will continue to rise. But what is the source of this startling price increase? Experts believe that a range of global factors is to blame for rising gas costs.
Covid-19 Pandemic
Crude prices fell and were negative during the pandemic, implying that some sellers were paying buyers to take oil. As a result, OPEC and other crude oil-producing countries reduced output until gasoline demand rebounded. After the pandemic’s impacts faded, another global issue impacted fuel prices: the Russia-Ukraine conflict.
Russian-Ukrainian Conflict
Russia is a key player in the crude oil industry. In 2021, the country produced 9.7 million barrels per day. Russia was second only to the United States, which produced 10.2 million barrels per day at the time.
As the situation between Russia and Ukraine worsened, the United States restricted Russian oil imports into the country. While this restriction has little impact on crude oil supplies in the United States, it does have an impact on the global market because Russia is a key supplier.
Before the prohibition, Russia supplied the US with about 90,000 barrels per day. This may appear to be a small amount in comparison to the millions of barrels that the United States can generate.
However, now that Russia is no longer a viable option, the US will need to find a new supplier, who may or may not be a member of OPEC. This will raise oil consumption and have an impact on US oil prices.
When Will Gas Prices Go Down?
The impact of global patterns and current events on the crude oil market and gas prices is significant. As a result of these factors, there is no way to predict when or how much gas prices will drop.
According to a Kelley Blue Book estimate, every $1 increase in the price of fuel will cost the average American driver an extra $56 per month. Because the minimum payment is $7.29 per hour, someone earning minimum wage would have to work an additional eight hours per month to cover the higher cost.
The amount of money you’ll spend on gas as a result of rising gasoline prices is primarily determined by the sort of car you drive. For example, driving a compact car now costs around $60 more per month than it did a year ago, while driving a full-size pickup now costs about $100 more per month. The average driver drives 15,000 miles per year, 45 percent of which is on the highway and 55 percent in the city.
Gas vs. EV: Which is More Economical?
Electric cars are becoming more popular due to a variety of characteristics, including decreased maintenance costs, better safety features, convenience, and mileage. One of the most visible advantages of owning an electric car is that it does not require gasoline to operate.
Electric vehicle drivers have the option to charge their cars either at home or at dedicated charging stations that offer hourly charging.Many people believe that having an electric car will save them money down the road when petrol costs are at an all-time high. Let’s look at the numbers to determine if that’s correct.
The average American family spends about 14 cents per kWh on electricity. Electric cars get three to four miles per kWh on average. So, if you travel roughly 600 miles per month, charging your car will cost you around $28.
Meanwhile, with current gas prices hovering around $4, filling a 12-gallon tank will cost roughly $48. And, because the average automobile can travel 240 miles on a 12-gallon tank, you’ll need to multiply $48 by two or three to reach your total monthly gasoline costs.
How To Save Money Despite High Gas Prices
To minimize expenses, many Americans have cut their travels short or just stayed at home due to the predicted rise in gas prices. However, you will need to drive about and eventually fill up on fuel at some point. Here are some tips for getting the most out of your gasoline.
- Frequent Vehicle maintenance
- Move Light
- Keep your tires inflated
- Use a gas price app
- Pay with cash
- Plan your destinations
Frequent Vehicle maintenance
To get the most out of your vehicle’s fuel economy, it’s important to keep it well-maintained. You can prevent your car from developing problems that could contribute to greater fuel usage by keeping up with oil changes, filter replacements, and other necessary repairs.
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Move Light
Remove any excess load because it will make your engine work harder and waste more fuel to keep your car running.
Keep Your Tires Inflated.
Under-inflated tires increase rolling resistance, which reduces fuel economy. According to a survey published by the Federal Website for Fuel Economy, correctly inflated tires can improve your vehicle’s fuel economy by up to 3%.
Use A Gas Price App
Presently, scouting local gas stations and heading to the ones offering the lowest dollar per gallon of fuel is a sensible method to save money at the pump. GasBuddy and other similar apps can help you identify the cheapest gas station near you or along your planned route.
Pay With Cash
If you pay with cash instead of a credit card, most gas stations will charge you less. When paying for gas with a debit card, you can get a discount, but make sure the cashier is aware that you’re using a discount before filling up.
Plan Your Destinations
Driving around and taking the longer route significantly reduces your vehicle’s fuel economy. So, the next time you’re out on the road, make sure to plan your trip to know which routes you can take to get to your destination faster.