Gas Price Volatility Comes Down to Supply and Demand

Economic fluctuations and weather conditions effect gas prices, but prices fall when supply outweighs demand.

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A person fills his tank at a gas station in Miami, Fla.

Gregg Laskoski is a senior petroleum analyst for GasBuddy.com.

Understanding the stormy nature of gasoline prices takes many things, not the least of which is patience. Just two months ago the U.S. national average price of gasoline was approaching $4 per gallon and the media chorus repeatedly asked analysts, economists, and men and women on Main Street what the president needed to do and when.

Predictably, politicians eager to score points with voters made it clear that if they were in charge they'd hit the Strategic Petroleum Reserve faster than a college fraternity can tap a beer keg during Homecoming Week.

During the same period NYMEX crude oil fell from $109 per barrel in late February to its current price range at $82-$84 per barrel. The national average price of a gallon of gas has slipped to $3.55 and many oil industry observers believe it could shed another 15 cents per gallon before the summer is over.  

[See the 10 priciest years in history for gas.]

How quickly the climate has changed. What happened? With virtually zero governmental intervention, the supply side of the equation strengthened while the demand side weakened, both globally and nationally. U.S. oil production, now at 7.84 million barrels per day, is at its highest level in 14 years. At the same time, the Saudis report that its oil production exceeds demand by 10 million barrels per day, so something's got to give. If you guessed that's the price, you're correct.

While refinery difficulties in the United States this year also tightened fuel supply in some parts of the country, most notably in California, the Pacific Northwest, and the Northeast, those issues have been resolved for the most part. In the Northeast, what could have been a severe supply problem with potential refinery closings was averted with Delta's purchase of the Conoco-Phillips refinery in Philadelphia and Energy Transfer Partner's purchase of the Sunoco refinery (335,000 barrels-per-day capacity) there too. Both remain in operation. 

[See a slide show of a reality check on U.S. energy sources.]  

On the demand side, neither the United States nor China—the world's largest oil consumers—anticipate robust growth any time soon. Anemic numbers from the U.S. Department of Labor reflecting new jobs created in March, April, and May tell us there's no reason to anticipate any uptick in fuel demand by workers returning to nonexistent jobs.

Yes, oil and gasoline prices are impacted directly and indirectly by many factors ranging from global currency fluctuations to regional weather conditions, but the greatest indicator of where they're going and why remains supply and demand, the Scylla & Charybdis through which free markets navigate daily.

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