I follow the news pretty closely, and as such, I try to explain current economic events to my History students. But when I explain what factors influence the constant changing price of gas at the pump, I feel like I don't have the full story.
What causes the daily, sometimes hourly changes in the price of gas, besides the desire to capitalize on a profit situation?
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Supply and demand and a tightly controlled/measured distrubution of gasoline seem to be the largest determining factors.
This seems odd, at least a little bit, because there is apparently so much gasoline being used. A relatively small fluctuation in supply, such as the rare release of emergency strategic gasoline by the US, can have a significant impact on the prices at the pump.
Lately there has been discussion on what the effect of higher efficiency cars (and electric cars) will be on gasoline prices. The consensus seems to be that prices will continue to rise to compensate for the increased fuel efficiency.
This doesn't entirely make sense given the usual supply and demand model, but I'm not an economist and I don't have a good sense of how this all plays out.
Gasoline is not controlled by the laws of supply and demand, because the industry is regulated by cartels such as OPEC. Since it is not a free market, supply and demand do not apply in the same way. The cartels and few gasoline companies decide when to raise prices. Because we are a captive audience, we have to pay or get an electric car.
From what I've been hearing, the rising demand of oil in China and India is what has been making the price of oil worldwide go up. Our tax system is part of the cause also. Unlike sales taxes, the tax on gas is not a fixed rate. As the price of gas rises, the percentage of taxes we pay rises also.
The logic of theory of demand and supply of is very correct in itself. If people have complete and correct information about the demand and supply of a commodity like crude oil the market price will be determined by these two factors. However, people do not have such perfect information, and this is the primary cause of much wider and frequent fluctuations in crude price than can be explained by changes in demand and supply alone.
This happens because, in absence of actual information on demand and supply, people take their decision based on their expectations of what the demand and supply will be in future. Unfortunately the swings in collective expectations of people are frequently much more than actual fluctuations.
The price fluctuation are further aggravated by speculative buying and selling, which has no relationship with actual demand and supply.
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