Steadfast FinancesWhy Gas Prices Rise

Why Gas Prices Rise

Filed in Economy , Energy crisis , Gas Prices 0 comments

Brace yourselves, because it’s about to happen again. The summer will come and gas is expected to make all kinds of new records. It all means more expenses to travel, to eat and even to work (if you commute). There are many things we like to see grow. There are the tomato plants we plant in the spring, our children, our income and our investments. No one likes to see gas prices growing. So why is it that the cost of gas is always going in the wrong direction?

Demand

Economics 101: As people demand more of a product, the price rises. There is a lot of demand out there for gas and oil. It’s warming up outside which means more people are traveling, but personal transportation is only the tip of the iceberg. All of the products you find in your local grocery store need to be shipped, and gasoline fuels shipping. Many products, like those made of plastic, require oil as an input in production. Even our food takes oil since most farmers use fertilizer that is oil-based. Tack on the fact that the whole world is developing and demanding oil and you have a recipe for price inflation.

Speculation

Oil isn’t just bought and sold from oil company to gas company, it’s also a traded commodity. Since there is a multitude of investors betting that oil will increase in the long-term, it causes oil prices to increase in the short-term too. Just think of it next time you are at the pump; you aren’t just paying to extract and refine crude oil, but you may also be paying for some guy’s financial bet.

Geopolitical Tensions

This one is mostly tied to speculation, but it is worth mentioning separately. If you expect Iran, (a major oil supplier), to be in military conflict with Western nations, it is only reasonable to suspect oil production in that nation will stagger and hurt global supply. So while nothing has transpired to hurt Iran’s production, speculators influence the price up or down based on their bets about the likelihood of tension.

Of course, actual tensions within or without an oil-producing nation can have a direct correlation on oil supply and price.

Nature

Creating and delivering gas to your vehicle is a complex network that can easily be stalled by nature. Gasoline truck drivers need clear roads to travel, refineries need power and ships need safe waters for prices at the pump to be at their lowest. When natures frustrates our infrastructure, supply of gasoline is interrupted and prices go up.

Laws and Taxes

Gas isn’t just a product that can be sold for profit; it is a way to generate revenue for government agencies. There are two ways in which governments tend to increase the cost of gas.

Laws and regulations can have a large impact on prices. Although I’m not saying that either should be abolished, but it is important to note the influence on gas prices. Government-mandated blends of gasoline tend to tack on at least $.10 to the high price of gas every summer.

Taxation is also a silent partner in crime to inflating gas costs. Local governments have quietly been increasing gas taxes. In NY, gas is subject to sales tax so that as gas prices rise, taxes paid also increase.

There are plenty of factors that influence gas prices. Unfortunately, the best way to fight rising prices is producing a great deal more gasoline.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

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Posted by Shaun   @   15 March 2012 0 comments
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