How Do Changes in Gas Prices Affect the Average American Driver?
Budgeting is a must for the average American. Aside from allocating a budget for groceries, rent, and electricity bills, most Americans also have to set money aside for gas.
Like other commodities, gasoline prices tend to rise or roll back, depending on several factors. And if you're someone who's always out on the road for work or travel, you surely wouldn't mind if gasoline prices dropped a few cents.
Unfortunately, the same thing can't be said about a sudden increase in gas prices一especially for someone who's living off paycheck to paycheck.
Gasoline price hikes impose a series of consequences. People would rather stay at home, opt for public transport, and even cut back spending on other essentials to get their daily drivers going.
So why not keep the prices down?
Unfortunately, it's not that easy. There are several reasons behind the fluctuating gas prices, and it involves a whole lot more than the business your local gas station is involved in.
How Are Gas Prices Determined?
Gas prices are primarily determined by five factors一supply and demand, the cost of crude oil and the refining process, distribution and marketing, and tax rates.
Supply and Demand
In economics, the law of supply and demand refers to the relationship between the number of commodities a producer is willing to sell and the number of commodities a consumer is willing to buy.
If there is great demand for a product that has limited stocks, the law of supply and demand suggests that the product can be sold at a higher price.
This means that a shortage in crude oil and a high demand for gasoline among consumers could jack up gas prices. Likewise, an increase in oil supply could cause the gas prices to go down一which is what happened in 2014 when the US explored new shale oil reserves.
Also, note that seasonal demand can cause gas prices to go up. For example, the demand for gasoline increases every summer because more families travel for vacation.
Crude oil is the most widely traded global commodity. According to a report by the US Energy Information Administration, the price of crude oil accounted for 56% of gas prices in the last decade and dropped to 43% during the pandemic.
Crude oil undergoes a refining process that turns it into gasoline. It is distilled and mixed with required additives, affecting gasoline production costs. Seasonal and regional blending requirements for pollution reduction and the addition of ethanol are also factors that affect the production cost.
In the decade through 2020, refining costs accounted for 14% of the average gasoline retail price.
Distribution and Marketing
After the refining process, gasoline is shipped to storage tanks and distributed to gas stations, which require staff and maintenance. This accounted for 14% of the gasoline retail price from 2010 to 2020.
According to Investopedia, state and federal taxes accounted for 16% of the gasoline retail price in the decade through 2020.
Federal gasoline tax rates haven't changed since 1993, which include excise taxes of 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel.
Who Controls Gas Prices?
We've already established the idea that supply and demand, tax rates, crude oil, marketing and distribution, and the refining process determine gas prices.
Still, a common misconception about high gas prices is that local gas stations or even the president control them.
But in reality, the price and supply of crude oil, which accounts for almost half of the gasoline retail price, is controlled by the Organization of Petroleum Exporting Countries (OPEC).
OPEC is a cartel of 13 countries controlling 78% of the world's known oil supply. The organization includes Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, Algeria, Nigeria, Gabon, Angola, Equatorial Guinea, and Congo.
The organization essentially controls the price of crude oil by supplying less or more to the global market. And because they control the majority of the world's oil supply, countries that are not part of the organization like the US are still affected by the changes in gas prices.
During the pandemic, crude prices dropped and turned negative, which meant some sellers were paying buyers to take oil. This led OPEC and other countries that produce crude oil to cut back on production until the demand for gasoline shot back up.
After the effects of the pandemic began to fade, another global crisis began to affect gasoline prices一the Russia-Ukraine conflict.
Russia is a major player in the production of crude oil. The country pumped out 9.7 million barrels a day in 2021. At the time, Russia was second to the US, which produced 10.2 million barrels a day.
As the conflict between Russia and Ukraine progressed, the US banned Russian oil from being imported into the country.
While this imposition doesn't really affect the crude oil supply in the US, it does affect the global market because Russia is a major supplier.
Russia supplies the US with approximately 90,000 barrels per day before the ban. This might seem like a relatively small number compared to the millions of barrels that the US can produce.
However, with Russia out of the picture, the US will need to look for a new supplier, which might or might not be a part of OPEC. This will increase the demand for oil and affect US oil prices.
Why Are Gas Prices Going Up?
In early 2022, the US recorded its highest price increase for gasoline since 2008, and experts predict that it will jack up even further.
But what exactly is causing this alarming price hike?
According to experts, a series of global events are likely the cause of increasing gas prices.
When Will Gas Prices Go Down?
The shift in gas prices largely depends on global trends and current events that affect the crude oil market. Because of these, there is no definite way of knowing the exact day or month gas prices will go down.
What High Gas Prices Are Costing the American Driver
The average American driver will have to shell out an additional $56 a month for every $1 increase per gallon of gasoline, according to a report by Kelley Blue Book.
Considering that the minimum wage is $7.29, someone working minimum wage would have to work for an extra eight hours per month to make room for the additional expense.
Additional Costs Per Vehicle Type
The amount of money you'll spend on fuel with increased gasoline prices largely depends on your vehicle type.
For example, a compact car now costs around $60 more a month to drive than a year ago, while full-size pickup owners now have to spend about $100 more for the same period.
The average driver racks up 15,000 miles per year, 45% of it at highway speeds and 55% at city speeds. To find out how your vehicle type compares, check out the estimates below:
Source: Kelly Blue Book
Recharging EVs vs. Refueling Gas Cars
Several factors contribute to the rising popularity of electric cars, such as lower maintenance costs, advanced safety features, convenience, and mileage.
But perhaps one of the more noticeable perks of having an electric car is that you don't need gasoline to keep it going. Electric car drivers can charge their vehicles at home or at dedicated charging stations that charge by the hour.
When gas prices are at an all-time high, many would think that having an electric car can save you a couple of bucks down the road. Let's do the math to see if that's true.
The average American household pays approximately 14 cents per kWh. Electric cars usually get three to four miles per kWh. So if you drive about 600 miles a month, that would mean you spend around $28 to charge your car.
Meanwhile, with the current gas prices hovering at $4, filling up a 12-gallon tank would mean you'll spend around $48. And considering that an average car can travel 240 miles on a 12-gallon tank, you'll have to multiply $48 two or three times more to get your total gasoline costs per month.
How to Save Money at the Pump
The inevitable increase in gas prices has caused many Americans to cut their trips short or simply stay at home to save money. But there will come a time when you'll need to drive around and eventually top up on gasoline.
Here are some things you can do to get the most out of your fuel.
Get rid of extra cargo because heavy items can make your engine work harder and consume more fuel to keep your car going.
Keep Your Tires Inflated
Under-inflated tires tend to reduce fuel economy by increasing rolling resistance. On the other hand, properly inflated tires can improve your vehicle's fuel economy by as much as 3%, according to a report by the Federal Website for Fuel Economy.
Use a Gas Price App
Nowadays, one smart way of saving money at the pump is by scouting nearby gas stations and going to the ones offering the least amount of dollars per gallon of gasoline. Apps like GasBuddy can help you find the cheapest gasoline station near you or along your intended route.
Pay With Cash
Most gasoline stations charge lower if you pay with cash instead of a credit card. You can also buy gas at a discounted price when using a debit card, but make sure the clerk is aware that you're using a discount before topping up on fuel.
Plan Your Routes
It's common sense that driving around and taking the longer route can reduce your vehicle's fuel economy. So the next time you're out on the road, make sure to plan your trip ahead to know which routes you can take to get to your destination faster.