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Gasoline "prices at the pump" go up and down and oil "costs per barrel" go up and down, but they do so at different rates and even in opposite directions sometimes.  We want to think that demand and supply controls prices when the cost of crude oil is set by the same economic conditions that determine the price of gas.  What are these mismatched trends (graphs of each are shown in the following web links) telling us about how demand and supply work in the market? http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPMRU_PF4_Y35NY_DPG&f=A http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=A

These mismatched trends tell us that supply and demand is not the only factor that goes into determining either how much gas will cost or how much a barrel of oil will cost. Many factors not directly tied to the economy determine the price of gas. These factors include things like the geopolitics of OPEC countries as well as new technological developments in oil extracting processes.

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To understand the complicated relationship between the supply and demand of barrels of oil and gas prices at the pump, it is first and foremost important to recognize that the consumer “demand” for gasoline is not the only factors that can drive its prices up or down. Most of the...

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To understand the complicated relationship between the supply and demand of barrels of oil and gas prices at the pump, it is first and foremost important to recognize that the consumer “demand” for gasoline is not the only factors that can drive its prices up or down. Most of the crude oil used by the United States is not actually extracted domestically. Rather, much of it comes from one of the countries that are a part of OPEC. Thus, the international relations that exist between the United States and OPEC countries, as well as those between OPEC countries, heavily determines how easily the US can import oil reserves coming from those countries, and therefore how much gas will cost at the pump. A good example of this phenomenon in practice is the 1973 OPEC oil embargo. During this crisis, the primary exporters of Middle-Eastern and African oil, including Iraq, Iran, Libya, and Saudi Arabia, refused to sell their product to American oil companies because they claimed that Western encroachment on their natural resources was eroding their national sovereignty. In any case, the price of gas in the United States skyrocketed as a result, despite the fact that no real change had taken place in consumer demand.

Another, non-supply and demand factor that can drive oil prices up and down has to do with the technological developments that allow oil to be extracted at all. In 2014, oil production in the US was constantly shifting upwards, as new techniques to extract oil from tight rock and tar sands were developed. These techniques are generally known as “hydraulic fracturing and horizontal drilling,” and greatly accelerated the rate at which some oil companies could tap into oil reserves domestic to the US. However, these kinds of projects tend to be much more short-term than conventional off-shore oil drilling or the extraction of oil from underground veins, which is why the prices associated with oil derived via these newer techniques tend to be more elastic. Thus, the prices associated with oil extracted through newer methods tend not to follow trends in supply and demand for gas in linear ways, because the methods themselves are not predictable.

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Discrepancies between crude oil prices and the prices charged to consumers of gasoline occur for several reasons. For starters, oil prices are never solely a product of supply-and-demand equations. The role of speculators in the financial services industry with respect to oil prices is estimated to account for as much as 60 to 80 percent of the price of a barrel of oil. What that means is that the financial machinations of those who bet on oil prices without having any other role in the petroleum sector is a more important force in setting those prices than calculations of actual demand. While oil and gasoline prices largely track each other, there are perturbations in the relationship between the two commodities because of these financial wagers.

Differences between oil and gas prices also exist because of such variables as federal and state taxation rates that sometimes drive up the cost of gasoline to consumers irrespective of the price of a barrel of crude. When oil prices plunge for whatever reason (say, discovery of a major new oil field, a decision by a major oil producer/exporter like Saudi Arabia to increase production to finance domestic projects, or more recently, the introduction into the global market of American and Canadian shale), local and federal governments usually consider raising tax rates on gasoline both to generate revenue and to attempt to drive down consumer demand, which tends to increase during the summer vacation driving months.

In short, while oil prices are largely a product of supply and demand, and while gasoline prices, in general, track oil prices, variances occur for the reasons stated above.

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As the question says, "we want to think that demand and supply controls prices when the cost of crude oil is set by the same economic conditions that determine the price of gas." This would make intuitive sense because gasoline is derived from crude oil. Additionally, this is normally the case. The first graph shows "spot prices" for gasoline at New York Harbor from 1986 to 2016, and the second shows the same thing for crude oil at Cushing, Oklahoma during the same period. Looking at the two graphs, we can see that they more or less track each other during some periods. For example, looking at 2008, we see that price of crude oil was 100 dollars a barrel. This coincided with the record price of gasoline in that same year, which reached a historic high. In fact, this is typical of a long-term trend in which the price of both crude oil and gasoline slowly rose over more than twenty years. Overall, this trend continued after the market turbulence of 2008, with crude and gas prices rising and then falling fairly significantly in the 2010s.

But the relationship between the two is never precise, and this is reflected in the graph to a limited extent. One economist has said that, although prices generally remain near each other, the prices of gasoline and crude oil "move in an elliptical orbit" around each other. In other words, although there is a relationship between the two, sometimes gasoline prices may not exactly respond to trends in crude oil prices in the short term. There are refining costs and other issues that might not affect crude oil prices, but they can cause the price of gasoline to rise as the supply falls. Gasoline cannot be stored in the long term, and it is very (demand) inelastic, meaning that the demand for it usually stays high no matter the price. Sometimes (including the last year or so in most of the United States) crude oil price drops do not equate to lower prices at the pump, even if the two do usually track each other over the long term.

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