Q&A: Making sense of why gasoline prices keep climbing

Orlando SentinelAugust 1, 2013 

Gas prices leapt recently as crude oil costs reached their highest level in more than a year. Annoying to all, confounding to many, rising fuel prices are a communal pain in the gas tank and a source of shared griping. The Orlando Sentinel asked AAA’s Jessica Brady, who monitors the market, to explain.

QUESTION: Let’s start with the painful stuff. What do you expect to happen with gas prices over the next few weeks?

ANSWER: Over the next few weeks, I think we’re going to continue to see prices go up. We’ll probably see the rate of increase slow down to maybe 3 cents or 5 cents per week. I think that’ll be case maybe even into Labor Day.

Q: What are the main drivers of gas prices?

A: In general, it’s the fundamentals of supply and demand. When demand increases, price increases. When the demand decreases, the price decreases. The value of the U.S. dollar also drives the price of oil up or down.

Q: But it’s not just simple consumption?

A: No. The price changes on world events — or even the threat of world events. If there’s tension in the Middle East or North Africa, if there’s the potential to disrupt the supply, that’ll drive prices higher. Economic news is a factor. If we get a series of positive reports, that’ll push prices up because it’ll be taken as a sign that consumption’s going to increase. Weather — the threat of a storm in the Gulf — or problems at a refinery, if it’s down for maintenance, can all have an impact.

Q: How is it that prices change so fast? It seems like an event will happen, and “boom,” the prices change.

A: Speculators. There are so many speculators driving the market right now. Back in 2011, there was a just concern that the Suez Canal might be blocked. It never happened, but we saw prices skyrocket. The same thing with hurricanes and storms. We may get a named storm that may or may not really pose a threat, but it’ll still feed speculation in the oil market. They’re all just betting on future prices. Many times, the price of oil changes on the hour.

Q: How much of the price is tied to taxes?

A: Typically, about 13 percent of the costs of a gallon of gas goes to taxes. If you were to break it down, about 68 percent goes to the cost of crude oil, 8 percent is refining costs and profit, 11 percent is distribution, marketing, and retail costs and 13 percent is taxes.

Q: Once you’re in a community, what drives local pricing?

A: It depends on the location of the station. The most convenient, those right near an interstate off-ramp, those near an airport and rental car facilities, tend to be more expensive. Anything near the attractions will be more expensive. In areas where you have a lot of stations grouped together, they tend to be more competitive. It’ll also depend on your retail overhead and if they’re a no-name brand or a brand name.

Q: About those brand names. Do brand additives really make a difference?

A: If you ask the brands, they’d tell you they do. Is it true? It’s a matter of opinion.

Q: What’s the biggest misconception about gas prices?

A: The biggest is that retailers are setting these prices and making all the profit. The margins for most retailers are pretty small. The second biggest misconception is that it’s the president’s fault that gas prices are high. The oil market is global, and what we pay is affected by events all over the world — sometimes things that haven’t even happened. It’s not like the president can do “X” or “Y” to magically make prices go up or down.

Q: It sounds a little like a massive game of liar’s poker.

A: You could say that.

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