Inflation

Gasoline comes from oil. Retail prices are determined by the sellers, based on their costs, and the prices paid to produce, transport, and refine oil. The factors influencing these costs are discussed below.

The Rise and Fall of Prices

The price of oil rose from $19 a barrel in 2002, to over $140 a barrel in June of 2008. This was more than the rise in prices of other commodities (inflation). Speculation and the OPEC cartel (monopoly on supply) are suspected causes, although the growth of global economies (especially China) increased demand significantly over six years.

Other factors that influence the cost of gasoline : Transportation and importing costs, refining limitations, and taxes and fees.

Oil prices fell back below $40 a barrel by the end of 2008. The price of gasoline fell by as much as 60% in the US between June,2008 and December, 2008. But by the middle of 2009, oil prices again advanced and so did the retail price of gasoline.

What Drives Oil Prices Up

The reasons that contributed to oil price inflation :

• Increase in the demands for oil in developing economies as in India and China.
• Disruption in the supply caused by the war in Iraq.
• Contentious concern about the non-renewable resource, when most of the oil reserves are being exploited.
• Refining limitations and taxes (the US is refining less crude oil).

Oil prices depend on the these factors, and the price of the oil is not determined by oil companies, but by market operations, which are dominated to a great extent by the producers, chiefly the Organization of Petroleum Exporting Countries (OPEC).

Oil and World Trade

A number of factors influence the price of gasoline. It is a worldwide major commodity, listed on the big boards around the world. As such it acts like any other commodity such as wheat, gold, or currency exchanges. On the need scale, food commodities probably rank higher in need. However, the higher scales of economy require fuels such as gasoline. Gasoline is refined from crude oil, and used primarily in combustion engines for vehicles. As such, the demand for gasoline is very high in the more- advanced economic societies.

Gasoline is refined from the crude oil pumped out of the ground around the world. The whole network, from pumping to gasoline production and distribution, is very complex and uses large sums of capital to produce. As such the largest companies in the world are oil companies. So pumping, refining, and distribution costs are a large player. Since the whole world was growing rapidly at the turn of the century, demand outpaced supply or production capabilities of gasoline. So production cost is one large component.

Risk is another large component. Many events can contribute to its production and transportation including war in the Middle East, earthquakes in Russia or Alaska, hurricanes, tidal waves, ships sinking, fires, or damaged pipelines. The risk of delay or loss can create higher prices.

Brokers and speculators add a huge component, and oil like all commodities becomes a form of money. If inflation or devaluation of the dollar occurs , speculators will buy oil to counter the effects. This is probably the most resented of all aspects of the price of oil and OPEC is probably the largest of speculators. They cut the quantity of production hoping to force the price up. Moreover, private hedge funds may speculate rising or falling prices and purchase oil also. They all serve a purpose. Since the quantity needed was never reached, it is a buffer to reflect the higher costs that are likely in the future. The higher prices and future profit expectations may affect future plant production and other capital expenditures to accomodate future demand. It takes time, as much as ten years, to build a refinery. So in the short-term prices can be pushed up all over. However, with too much production (as happened in the 1980's) the price is pushed down, and this is exacerbated by short selling. Many companies merged or folded up. Texaco was the largest to go into chapter 11 bankruptcy. Short term large profits of oil aid the future production of more oil, but at the pump it is hard to see a doubling of prices as helpful.

The bubble was reached in the world economy, and oil prices were probably the last thing to create the downturn we have today. It alone can cause all parts of society to change, and that large a scale of changes will always create a weakened economy until the markets realign themselves to new changes in demand. Of course if we meddle with them, it takes longer to finally reach a new equilibrium. The market is always striving to reach this, but rarely does. Each day is a new day, with threats of atomic bombs from North Korea, or secret attacks from underground groups, and each can affect the price of oil. And oil can affect everything else. So the market is affected by each small thing that pops up.

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SIMPLE ANSWER- Mainly, demand is high, and when people conserve it does lower. However, costs are a highly fluctuating variable in exploration and refining, so that also factors into the retail cost.