how the forces of demand and supply influence gas prices course hero

by Mattie White 3 min read

How does the law of supply and demand affect gas prices?

The law of supply and demand has a predictable impact on the price of gas. Less predictable are how the supply side and demand side will change over time. Oil does not come out of the ground in the same form everywhere it is discovered.

What is the relationship between supply and demand for oil?

Both supply and demand are changing all the time, as new oil wells are discovered and as economic conditions impact consumer demand. As a longer-term general trend, the supply of high-quality oil is fixed and dwindling while global demand is increasing with a rising population and economic growth.

What factors affect the price of gasoline and oil?

Supply and demand are going to continue playing a role in the price of oil and gas. This supply and demand is a part of the world of the fuel retailer and wholesaler. If you are in need of wholesale gasoline, contact us here at Kendrick Oil.

What are the main drivers of natural gas demand?

On the demand side, overall economic growth, weather and competing fuel prices affect gas demand. Here is a general breakdown of the demand of natural gas across the some of the main sectors. When it comes to electrical power generation, natural gas power burn has been increasing due to low gas prices relative to coal.

What are the components of gasoline retail price?

The retail price of gasoline includes four main components: Retail pump prices reflect these components and the profits (and sometimes losses) of refiners, marketers, distributors, and retail station owners.

Where is gasoline shipped?

Most gasoline is shipped from refineries by pipeline to terminals near consuming areas, where it may be blended with other products —such as fuel ethanol—to meet local government and market specifications. Gasoline is delivered by tanker truck to individual gasoline stations.

How much is the tax on gasoline?

Federal, state, and local government taxes also contribute to the retail price of gasoline. The federal tax on motor gasoline is 18.40 cents per gallon, which includes an excise tax of 18.30 cents per gallon and the federal Leaking Underground Storage Tank fee of 0.1 cents per gallon.

How does supply and demand affect gasoline prices?

The law of supply and demand regulates gasoline prices, as it does nearly all commodities. Both supply and demand are changing all the time, as new oil wells are discovered and as economic conditions impact consumer demand. As a longer-term general trend, the supply of high-quality oil is fixed and dwindling while global demand is increasing ...

How are gas prices ruled?

Gas prices, like most other commodities, are ruled by the forces of supply and demand. Holding demand constant, when supply rises prices fall and. Holding supply constant, when demand goes up, so do prices.

What is the law of supply and demand?

While supply and demand get the most focus (and the most blame), inflation and taxes also play a part in increases in the cost to consumers. The law of supply and demand has a predictable impact on the price of gas. Less predictable are how the supply side and demand side will change over time.

How is gasoline price determined?

Logically enough, the price of gasoline is determined in part by the price of oil. But a whole host of other factors impact the average retail price of gas. According to the U.S. Energy Information Administration, the price of crude oil actually comprised only 54% of the average retail cost of gasoline in 2019.

How many members of OPEC regulate oil?

Note that oil supply among large producing nations is regulated by the cartel called OPEC (organization of petroleum exporting countries). OPEC's 14 members aim to regulate the supply of oil in order to set the price on the world market. Within OPEC, each member nation is allocated a production quota.

Why is oil so expensive?

This type of oil is in high demand because it contains fewer impurities and takes less time for refineries to process into gasoline. As oil gets thicker, or "heavier," it contains more impurities and requires more processing to refine into gasoline.

Why can't people change their fuel consumption?

While they may change their fuel consumption by buying more fuel-efficient vehicles, moving closer to work, or taking public transportation, they can't or won't do so in response to a temporary hike in prices.

How does increased supply of oil affect gas prices?

crude oil has helped to lower oil prices. This increased supply has lead to decreases in the price of gas at the pump. When supplies are decreasing, suppliers will raise the price due to the scarcity of the resource.

How do consumers get around gas prices?

Many consumers are getting around the fluctuations in gas prices by buying hybrid or electric vehicles, or going with alternative fuels like biodiesel. When purchasing a new car, consumers are taking advantage of new guidelines for improved gas mileage in new vehicles. Supply and demand are going to continue playing a role in the price ...

Why do gas prices drop during summer?

When the summer travel season is done, demand for gas drops. Many fuel retailers will lower their prices to entice their regular customers to come and fuel up. As supply increases, suppliers will lower their prices due to the abundance of product. This encourages consumers to purchase more.

Why do oil prices fluctuate?

The prices for those commodities will fluctuate due to supply and demand. When consumer demand for a commodity rises, the supplier will meet that demand at a higher price.

What happens when gas prices go up?

When gas prices go up for any length of time, consumer demand goes down. People will make fewer trips and buy vehicles that are more conservative on gasoline. When gas prices go down, consumer demand will pick up. Consumers will be more willing to take road trips and buy vehicles that use more fuel.

What happened in 2005?

In 2005, Katrina knocked out production on several oil rigs in the Gulf of Mexico as well as stopped refinery output in Texas and Louisiana. This drop in supply translated to higher prices for oil and gasoline.

Which group limits the amount of oil they produce to keep the prices up?

Oil producing nations have a certain amount of power over the price and supply of crude oil. Members of the Organization of Petroleum Exporting Countries (OPEC) often limit the amount of oil they produce to keep the prices up.

Why is gas storage important?

Gas storage levels also plays a key role when looking at supply side. Natural gas in storage provides a valuable cushion to meet peak demand. During periods of lower demand, surplus can be injected into storage facilities.

What is the transportation sector?

The transportation sector accounts for a small amount of natural gas used as vehicle fuel from liquefied natural gas or LNG. Over the last few years, the United States has seen the development of new LNG exporting terminals, mostly in the gulf coast region.

What is the second largest sector of the economy?

The second largest sector is within industrial usage. Natural gas is used as raw material to produce fertilizer, chemicals, and hydrogen. Residential and commercial sector utilize gas as a fuel for heating or cooling purposes.

Is natural gas a responsive supply?

Overall, natural gas supply is characterized as being quite responsive to a relatively wide range of prices. However, restrictions of the existing infrastructure impact additional flows, rendering the supply curve very inelastic even when prices are high. On the demand side, overall economic growth, weather and competing fuel prices affect gas ...