2 min read

Why are gas prices going up?

Bell Performance : Mar 7 2013

Just a quick note on the always-controversial topic of gas prices, which have been skyrocketing for about the last month. Why are gas prices going up? This has consumers really concerned and downright mad. It's confusing and hard to make sense of, at time. We'll try to offer some explanations.

To start with, here's a handy chart comparing national gas prices (the blue line) with the cost of crude oil (the red, though it's unknown what type of crude this is). This chart comes to us courtesy of GasBuddy.com (a great place to track gas prices wherever you are).

why are gas prices going up

What you notice is the fairly typical rise and fall of prices, peaking in March of 2012, bottoming out in late June 2012, peaking again in September 2012, and bottoming out most recently in early January. But starting around January 20th, national gas prices have shot over over 50 cents a gallon in just 4-5 weeks. This seems to be a faster rise than, say, when gas prices rose from late June. On 6/29/12, gas was about $3.35 a gallon. It rose pretty steadily to a new high of about $3.85, which is a rise of fifty cents (again). But it took about ten weeks to do this, not four weeks. So drivers are wondering what the deal is. They get concerned when gas prices rise 17 cents in just a week.

It's not just oil prices

The standard answer to this question has been to refer to whether oil is going up or down. And no doubt there is a relationship. The cost of oil is about 70% of the cost of the gasoline, so it stands to reason they would follow or track each other. Looking at the graph above over the last year, you can see how oil and gasoline prices tend to follow each other, although they don't track each other to the penny. Sometimes gas prices will rise or fall faster or slower. But you see recently that the gas prices stopped tracking the oil price. Or did it? What really happened was there was a period in November when oil prices were going up but gas prices were actually going down. Analysts say that was due to a drop in consumer demand due to Superstorm Sandy, but also a temporary suspension of the Jones Act, which normally requires all goods transported between US ports to be done so with US-made ships and US-personnel. The Obama Administration issued a temporary waiver of those requirements to enable more oil to be shipped in to help with shortages at that time. Consumers benefitted with lower gas prices. Gas then bottomed out and have resumed following oil prices at the beginning of the year. So when someone says "gas is going up b/c oil is going up", technically they're right. But there are other things to consider, too.

OPEC oil production - they've been cutting oil production over the last few months in response to oil production being up from other major producers around the world.

Refinery Shutdowns - we're at the point in the year where refineries are shutting down to make the switch over from winter gas to summer gas. This temporarily puts a cap on the total refining capacity and causes gas prices to shoot up for the short term.

Investor Bets - like it or not, investors on Wall Street have a say in what gas prices are like. It seems more and more investors are buying into "gas futures" - betting that gas prices are going to go up. So the demand for these gasoline futures (the ability to buy a load of gasoline at a given price) goes up and the price for gas goes up.

The good news is that analysts think gas isn't going to go much higher; it will probably peak some time in March. They also think that gas prices are going to be lower overall for the rest of the year than they were last year. That's good news for us all.