Crude oil prices have determined at least half of the price of each gallon of gas over the last decade. As oil prices change daily, gas prices are constantly fluctuating, too.
The rest of the price of gas is based on refinery and distribution costs, corporate profits, and state and federal taxes.
Crude oil prices accounted for 61% of the price tag at the pump in February 2022. Another 14% of the total price of a regular gallon of gasoline went to refining, while the rest went to distribution, marketing, and taxes.
The nationwide average price of a gallon of regular gasoline was $4.09 during the week beginning April 11—down 8 cents from the prior week and up $1.24 from the same time a year ago.
Gas prices have soared to record highs as inflation continues to rise and Russia's invasion of Ukraine persists. Russia consistently ranks in the top three oil exporters in the world.
In March 2022, President Joe Biden announced the U.S. would ban imports of Russian oil, sending gas prices higher. However, the Department of Energy announced that it would release oil from the Strategic Petroleum Reserve at the beginning of April and prices slowly started to dip.
How Oil Prices Have Historically Affected Gas Prices
Oil and gas prices have been especially volatile since the 2008 financial crisis. The following chart illustrates their relationship, including major peaks and valleys over time.
West Texas Intermediate is crude oil used as a benchmark in U.S. oil pricing. Based on this benchmark, crude oil prices have risen and fallen dramatically multiple times since the 2008 financial crisis.
- 2022: In March, the national average for gas prices according to AAA reached a record high of $4.30 per gallon. Russia's invasion of Ukraine caused gas prices to increase by a striking $1.31 from the March 2021 average.
- 2021: In late January, regular gas prices averaged $2.39 per gallon, increasing to $3.39 per gallon in early November.
- 2020: In April, the combination of an oil price war and a worldwide pandemic helped to send the price of oil below zero, to nearly -$37 per barrel (/b). However, this abnormal occurrence was due to a technical imbalance in the futures market. Speculative investors, who were long on oil, but had no intention of taking delivery, fueled a massive sell-off of expiring contracts. Oil prices subsequently moved into positive territory, but the price of regular gas remained below $2/gallon until June when oil prices rebounded to $40/b. Gas prices rose when oil prices rebounded to $40/b, sending regular gas to $2.17/gallon.
- 2015: Prices fell below $37/b by the end of the year, driving regular gas prices below $2/gallon in early 2016. Gasoline prices remained between $2 and $3 per gallon of regular gas for most of the next five years.
- 2011: The price of oil reached around $113/b in April. By the next month, regular gas prices had reached $3.96/gallon. Oil prices remained higher than $90/b for the bulk of the next three years, dropping below that mark only briefly a few times in the aftermath of Iran threatening to close the Strait of Hormuz, an important oil transport channel. Gasoline prices, likewise, remained steadily higher than $3/gallon for regular gas until late 2014.
- 2008: Oil skyrocketed to around $145/b in July. That sent regular gas prices to $4.11/gallon. By early December, oil had dropped to around $49/b, and regular gasoline had dropped to $1.81/gallon.
How Supply and Demand Affect Oil and Gas Prices
Like most of the items you buy, supply and demand affect oil prices. More demand, like the summer driving season, creates higher prices. There is less demand in the winter as only some northern states use heating oil.
Oil price futures, traded on the commodities exchange, also affect oil prices. These prices fluctuate daily, depending on what investors think the price of oil will be going forward. Commodities traders are a big factor in determining oil prices.
How OPEC Affects the Price of Oil and Gas
OPEC is an organization of 13 oil-producing countries that produce 36% of the world's crude oil. In 1960, these countries allied to regulate the supply and the price of oil. They realized they had a nonrenewable resource. If they competed with each other, the price of oil would be so low that they would run out sooner than if oil prices were higher.
As of March 2022, the U.S. stores 577.5 million barrels of oil in the Strategic Petroleum Reserves. The federal government uses it to increase supply when necessary, such as when supply lines are interrupted after a natural disaster. In March 2022, the U.S. announced it would release 30 million barrels from the reserve in order to combat supply issues caused by the Russia-Ukraine conflict.
The 1973 OPEC oil embargo was the first time OPEC flexed its muscles. It cut off oil to the United States, limiting supply. Prices rose and shifted power away from U.S. oil producers. A higher price would have given other countries the incentive to drill new fields, which are too expensive to open when prices are low.
The United States also imports oil from a non-OPEC member, Mexico. This makes America less dependent on OPEC oil.
Where Is Demand for Oil Greatest?
In 2019, the United States used about 20% of the world's oil. Much of this oil is used for transportation. China and India were the next biggest users, utilizing about 14% and 5% of the world's oil production, respectively. They are followed by Japan and Russia at 4% each.
How Speculation Can Affect the Price of Oil and Gas
Oil futures, or futures contracts, are agreements to buy or sell oil at a specific date in the future at a specific price. Traders in oil futures bid on the price of oil based on what they think the future price will be. They look at projected supply and demand to determine the price. If traders think demand will increase because the global economy is growing, they will drive up the price of oil. This can create high oil prices even when there is plenty of supply on hand.
This is called an asset bubble, and it happened to gold prices during the summer of 2011. It also happened in housing in 2005. When the housing bubble burst in 2006, it led to the 2008 financial crisis.
Frequently Asked Questions (FAQs)
What are oil prices today?
How do you invest in oil prices?
Crude oil futures contracts give investors direct exposure to the price of oil. The USO ETF is an example of a similar product that offers oil futures exposure for stock market investors. You can also invest in stocks and energy funds that give you exposure to the oil industry more broadly.