Update on Oil and Gasoline Prices

Jane Van Ryan
Posted April 15, 2011

Wondering about the factors that cause the fluctuations in global oil and gasoline prices? News articles that have appeared over the past several days attribute the climb to instability in the Middle East, the decline in the dollar's value, and growing demand in China and India. A couple of days ago, Bill O'Reilly of the O'Reilly Factor once again blamed oil companies, asserting that they can raise prices at will. With all due respect to O'Reilly, it's clear that he doesn't understand how the markets work.

As we've explained on this blog, oil companies are price takers, not price makers. Oil companies find and supply crude oil to the marketplace, but the price is determined by buyers and sellers who put a value on oil through their transactions at commodities exchanges including The New York Mercantile Exchange (NYMEX). Yesterday, the price of crude oil finished the trading day on the NYMEX $1.00 higher at $108.11 a barrel.

Gasoline pump prices have tended to track crude oil prices because gasoline is refined from crude oil. AAA reports that the average price of gasoline yesterday (Thursday, April 14) was $3.815 a gallon, which is more than 90 cents a gallon higher than a year ago.

Analysts and economists are watching consumers' responses to higher oil and gasoline prices very carefully. Higher gasoline and diesel fuel prices are a financial burden for motorists, and can be a drag on the economy. The U.S. Commerce Department reported this week that although retail sales were up in March for the ninth straight month, they rose at a slower rate (0.1 percent) when gasoline sales were excluded from the data. The department also said that auto sales experienced the largest decline in a year. Similarly, the International Monetary Fund (IMF) predicted this week that the U.S. economy will grow this year, but more slowly than in 2010. The IMF World Economic Outlook said higher crude oil prices could put global economic expansion at risk.

A new poll shows that individual consumers are changing their plans to adapt to the high gasoline prices. A Reuters/Ipsos poll has found that 62 percent of Americans have reduced their driving and 68 percent have cut back on other expenses. As reported by The New York Times, "about 45 percent, have changed their vacation plans to stay closer to home."

So, what can you do to lessen the pain of higher gasoline prices? Keep your tires properly inflated; make sure your car is tuned up; and use fuel efficiently by planning and combining your trips to the grocery store, day care, and the bank.

Here's an additional tip courtesy of API Chief Economist John Felmy: Remove unnecessary weight from your trunk. As his wife told him, "John, it makes no sense to carry golf clubs and a snow shovel in your trunk." How true.

We've recently updated our materials about factors that influence oil and gasoline prices. I encourage you to find out more about Your Money, Your Energy and The Market Price of Crude.