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Driving Doldrums: Gas Prices on the Rise – Again

Posted: 2/13/2013 10:14:00 AM
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By Jen Alic of

Here we go again. U.S. gas prices are increasing, with AAA putting the average price at around $3.50+, and drivers wondering if they'll ever figure out how to predict prices at the pump. They won't--because even analysts find it challenging.

Let's try to simplify, if only to demonstrate why it's impossible to predict gas prices.

First of all, gas prices rise along with the price of oil, which itself is driven by a number of things, from basic supply and demand to Wall Street speculation and unrest in the Middle East--just for starters.

From December to January, the price of oil increased 10%. According to the U.S. Energy Information Administration (EIA), the price of crude oil accounts for 68% of the price of one gallon of gas. So oil prices are your biggest factor in attempting to determine fluctuations in gas prices.

Related Articles: 2013: Cheapest Gas in 4 Years?

The other determiners include taxes, the cost of refining gas and marketing and distribution prices. Here, refineries play a key role but only insofar as speculators respond to refiners' actions. About this time every year, some refineries go offline in order to adjust refining operations for "summer gas", which is refined differently in order to prevent smog that is more easily accumulated in warmer weather. This happens every year, of course, but the recent trend is for speculators to respond to it earlier each year.

But it is the price of oil that contributes to the bulk of the fluctuations in gas prices, and it is production (supply and demand) and speculation that drive oil prices more than anything.

On the production side of this equation, the last several months have seen OPEC lower production by some 1 million barrels per day.

Speculators are the U.S. drivers' biggest nightmare. Oil prices are set in the futures market through contracts that give traders the right to purchase oil by the barrel at a predefined price on a predefined future date. This is the speculators' playground.

Speculators bid on oil futures contracts and these aren't just individuals --this has metamorphosed into something much bigger, with institutional investors now in the game, including pension and endowment funds. Wall Street speculators are believed to contribute much to the short-term swings in oil prices, as they trade oil futures for short periods of time, for fast profit.

Related Articles: Why U.S. Energy Independence Means Pump Pain

So what will you pay for gas this year, overall? Analysts think the overall average will be a bit lower than last year, but one should take care when speculating on the speculators. Speculation aside, one can only hope that prices will be at least balanced out by economic expansion and increased U.S. oil production. The overall picture emerging is that while gas prices may not be as high as they were last year, they won't be decreasing by any significant amount.

For Americans, who spent almost $3,000 on gas last year, per household, this is unacceptable, even though this represents an average 4% of daily income that is well below the average 6% spent by Western European consumers. Or consider China, where one gallon of gas costs the average person about 30% of his or her daily income.

Americans find this hard to swallow because this average represents a doubling in 10 years, and it's not because they’re using more gas.

The good news is that when gas prices increase it generally indicates an improving economy.