Why Is Gas Getting Expensive Again?

Global Crude Oil Supply and Demand

The price of gasoline is influenced by the global crude oil market, which accounts for the largest portion of its retail cost. Crude oil is a globally traded commodity, and its price is determined by worldwide supply and demand. Changes in the global crude oil price lead to corresponding shifts in gasoline prices.

Global crude oil supply is influenced by major oil-producing regions and organizations. The Organization of the Petroleum Exporting Countries (OPEC) coordinates oil policies among its members to stabilize prices. In 2016, OPEC allied with non-OPEC countries, including Russia, to form OPEC+, which controls nearly 50% of global oil production and holds 70% of proven reserves, giving it market power.

Decisions by OPEC+ to adjust production levels directly impact global oil prices. For instance, a 10 million barrels per day cut occurred in March 2020 in response to plummeting demand during the COVID-19 pandemic. Even small production changes, like 200,000 barrels per day, can affect global oil prices given the daily global demand of approximately 100 million barrels.

On the demand side, global economic activity is a driver. When economies grow, particularly in developing non-OECD countries, the demand for crude oil and petroleum products increases to fuel transportation, industrial, and manufacturing sectors. Economic downturns or recessions can lead to decreased demand, putting downward pressure on prices.

Unexpected supply disruptions also play a role in price volatility. These can arise from geopolitical instability, military conflicts, natural disasters, or technical issues, such as refinery outages or pipeline problems. Such events can lead to actual supply shortages or create uncertainty about future supply, causing prices to rise as market participants factor in a “risk premium.”

While the United States is the world’s largest oil producer, outpacing Saudi Arabia and Russia, the global nature of the oil market means that decisions by OPEC+ and broader supply-demand dynamics still influence U.S. gasoline prices. The ability of other producers to offset supply losses and the level of global spare production capacity are factors in determining the impact of disruptions. The interplay between these supply and demand factors creates the foundation for crude oil price fluctuations, which are then passed on to consumers at the pump.

Refining and Distribution Expenses

Beyond the cost of crude oil, the expenses associated with refining it into gasoline and distributing it to consumers contribute to the final price at the pump. Refining crude oil is a complex process that involves breaking down crude into various petroleum products, including gasoline. The cost to refine a gallon of gasoline ranges from $0.40 to $0.70, depending on factors such as the type of crude oil, refinery configuration, and product specifications.

Refinery capacity and utilization play a role in gasoline supply and pricing. When refineries operate at lower utilization rates, perhaps due to planned maintenance, unexpected outages, or weather-related issues, the supply of gasoline can decrease, putting upward pressure on prices. Planned refinery maintenance often peaks in late February and March, which can contribute to seasonal price increases. Aging infrastructure and economic pressures can also lead to a decline in overall refining capacity, which further contributes to price volatility.

Different blends of gasoline are required for various regions and seasons, impacting production costs. Summer-blend gasoline is more expensive to produce than winter-blend. This is because summer blends have a lower Reid Vapor Pressure (RVP) to reduce evaporation and smog formation in warmer temperatures, requiring more complex and costly refining processes, such as removing butane. The additional production costs for summer blends can add as much as $0.15 per gallon. Conversely, winter blends include cheaper additives like butane, which aids in engine starting in colder weather.

Once refined, gasoline must be transported from refineries to distribution points and then to retail stations. This distribution and marketing component typically accounts for about 11% of the retail price of gasoline. Transportation methods include pipelines, tankers, and trucks, with pipelines generally being the most cost-effective. Any disruptions or increased costs in these transportation networks can affect the final price.

The operational costs of gas stations also factor into the retail price. These costs include property lease or mortgage payments, staffing costs, utilities, maintenance, insurance, and licensing fees. While gas stations typically operate on thin profit margins, often 1% to 2% on fuel sales, these fixed and variable expenses are passed on to consumers.

Geopolitical Events and Market Speculation

Geopolitical events and financial market speculation influence crude oil prices, adding volatility beyond basic supply and demand fundamentals. Conflicts, political instability, and diplomatic disputes in oil-producing regions can disrupt oil supply or create uncertainty about future supply, leading to price fluctuations. Tensions in the Middle East or the Russia-Ukraine conflict have historically caused oil prices to surge due to fears of supply disruptions.

Sanctions imposed on oil-producing countries are a geopolitical tool affecting prices. These measures can limit a country’s export capabilities, thereby tightening global supply. The effectiveness of sanctions can vary, as countries have sought to circumvent restrictions through alternative shipping and insurance, impacting the ultimate effect on global supply and prices.

Financial markets play a role in amplifying price movements through speculation and investor sentiment. Oil is not just a physical commodity but also a financial asset, with trading occurring in futures markets. Futures contracts allow traders to bet on future price trends without needing to handle the physical commodity. This activity can create additional demand for oil contracts, pushing up prices even when physical supply and demand remain stable.

Investor sentiment, reflecting collective optimism or pessimism about future economic developments, can influence speculative demand and, consequently, oil prices. Positive sentiment might lead to increased buying of futures contracts, driving prices higher, while negative sentiment can have the opposite effect. Speculation can add a premium to crude oil prices, with estimates ranging from $20 to $25 per barrel. This “risk premium” can arise when market participants anticipate potential future disruptions, even if those disruptions have not yet materialized.

The interplay between geopolitical developments and financial speculation creates a complex environment for oil pricing. While geopolitical events can trigger initial price reactions by affecting actual or perceived supply, financial market activities can then amplify these movements. This dynamic can lead to price swings, as seen during periods of heightened geopolitical tension or shifts in investor expectations.

Seasonal Trends and Domestic Policies

Gasoline prices are also influenced by seasonal patterns and domestic policies, which impact demand, production costs, and the final price consumers pay. Seasonal demand for gasoline increases during summer months and around holidays. This increased demand can put upward pressure on prices.

The transition to different gasoline blends for various seasons affects production costs. Summer-blend gasoline is mandated in many regions to reduce air pollution and smog formation in warmer temperatures. This mandate contributes to higher prices due to the more complex and costly refining processes required.

Domestic policies, particularly taxes and environmental regulations, contribute to the final price of gasoline. The federal excise tax on gasoline is $0.184 per gallon, and there is an additional $0.001 per gallon Leaking Underground Storage Tank fee. State and local taxes vary across the country, averaging around $0.33 per gallon for gasoline as of January 2025.

Environmental regulations, such as the Clean Air Act, mandate specific fuel formulations and emissions standards, which can increase refining costs. These regulations lead to the production of various “boutique fuels” tailored to specific regional environmental requirements, adding complexity and expense to the refining process. While these regulations aim to protect public health and the environment, they can contribute to higher gasoline prices.