The price of crude oil directlyaffects the price of gas in the U.S.
more than any other factor. It alsorepresents the largest percentage of what you pay for gas. Other factorsinclude distribution costs, refining costs, federal and state taxes, and corporateprofits. While these costs contribute a smaller percentage, and vary from stateto state, they are also more stable. The crude oil market tends to be unstableand its volatility is affected by three main influences: Oil futures traded onthe commodities market, supply and demand, and global political events. Speculatinginvestors can drive up the price of crude oil. Speculators buy and sell oilfuture derivatives, which are basically bets on the value of a barrel of oil ata future date, on the commodities market (NYMEX, ICE).
When speculators floodthe market with money buying derivatives then the price of crude oil goes upsharply. There was a sharp increase in the price per barrel of crude oil fromJuly 2004 to June 2008. On July 8th, 2004, the price per barrel ofcrude oil was $31.61 which is not very expensive. That price correlated withthe average gas price per gallon in the U.S. of $1.
93. By June 2008 the priceper barrel of crude was $143.68 and a few weeks later the price of a gallon ofgas jumped to $4.
17. Originally the sharp increase was thought to be due to severaldifferent factors, but that opinion has changed. “Most analysts now realizethat the sudden increase to oil prices was due to increased investment by hedgefund and futures traders” (Amadeo, 2017). Anotherfactor which can raise the price of crude oil is supply and demand. When demandis greater, such as in the summer, prices will increase due to the need forincreased production to keep up. Prices can also go up if supply gets low dueto emergency or disruption.
FACTORS AFFECTING CRUDE OIL PRICES 3The U.S. stores 700 million barrels of crude oil inStrategic Petroleum Reserves. The Strategic Petroleum Reserve (SPR) is theworld’s largest supply of emergency crude oil. These federally-owned oil stocksare stored underground in salt caverns along the Gulf of Mexico according tothe Department of Energy website. At the time of Hurricane Katrina in August of2005, the U.
S. oil production was severely disrupted. To make sure the countryhad enough oil and natural gas, the Department of Energy used 30 millionbarrels of crude oil from the SPR. That briefly caused the price of oil to goto $70.00 per barrel due to fears that there may be a longer-term shutdown andto increase production to replenish the supply of the SPR. The thirdinfluence on crude oil prices is global political events. In 2012 Iranthreatened to shut off access to the Strait of Hormuz which is a choke pointbetween the Persian Gulf and the Arabian Sea.
“The waterway is bordered on thenorth by Iran, and its closure could cut off access to 20% of oil shippedaround the world, sending fuel prices skyrocketing” (Alpert, 2012).The U.S. sent ships to the region and there were threatsgoing back and forth between countries for months.
When the first crediblethreat came out in January it had a significant impact on crude oil prices asmany feared that Iran may follow through and halt oil shipments at least for asignificant amount of time. “U.S. crude oil prices are at their highest levelssince May 2008, hitting $109.
77 a barrel. U.S.
oil prices climbed nearly 6%this week. In turn, the average price of a gallon of gas jumped more than 13cents” (Farrell, 2012).