Gasoline Pricing and Usage

Gasoline pricing and usage fluctuates depending on a variety of factors, including the price of crude oil, cost of processing the crude oil into gasoline, the distribution of the gasoline, the local demand for gasoline, the strength of a country’s currency, the local taxation of gasoline, government regulations, and the supply reserves of gasoline available globally and locally. These all factor into what the consumer pays for a gallon or liter of gas at the pump, which relates to the usage of gasoline in a particular area. Oil is a globally traded commodity, so the price of a barrel of crude oil is similar throughout the world when it is adjusted to a government’s currency. However, the price that a consumer pays at a gas pump may vary widely. This depends mostly on a government’s pricing policy, which is reflected in taxes or, in some cases, subsidization by the government.

Western industrialized countries have the highest rates of gasoline usage per person, with the United States being the largest consumer worldwide. Therefore, the major consumers of gasoline in the global market and their economies affect the supply and demand of gasoline. The price of gasoline also can affect usage, so the higher the price in a local area, the less gasoline is used by consumers. When gasoline prices rise, it affects the local economy. The more the consumer pays to fuel a vehicle, the less money that is available to spend on other goods and services. In addition, higher gasoline prices cause the cost of goods and services that rely on transportation to rise. Conversely, lower gasoline prices stimulate discretionary spending by consumers, encourage travel, and decrease the price of goods and services.

Background

The average price of gasoline has been tracked since 1929. This coincides with the start of the Great Depression, , which was one of the first times that shifts in gasoline prices was noticeable and affected the global economy. At this time, automobiles were becoming more common in urban areas, although even in Western countries, such as the United States, nearly half the population lived in rural areas. However, gasoline-powered engines in automobiles were far less efficient than they are today, so they required more fuel to operate. Gasoline prices rose more than 25 percent between 1931 and 1934 in the United States alone. According to some analysts, this may have contributed to the Great Depression, which did not end until 1939.

OPEC (Organization of the Petroleum Exporting Countries) was founded in 1960 in Baghdad, Iraq, by its initial member countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. In 1965, the headquarters was moved to Vienna, Austria, although Austria is not a member country. The other eight members are Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and United Arab Emirates. These countries account for a large percentage of the world’s oil production and most of the known global oil reserves. Because of this, OPEC has had a major influence on determining the price crude oil and therefore gasoline.

The 1970s saw two major oil crises fueled by conflict in the Middle East, and this was another time in history that gasoline prices and usage shifted dramatically. During the 1960s and 1770s, countries had become increasingly dependent on the oil-rich Middle East for crude oil supplies. The first crisis occurred in 1973 when an oil embargo by the Organization of Arab Petroleum Exporting Countries (OAPEC) targeted countries that supported Israel politically after an attack on Israel by Syria and Egypt during the Jewish Yom Kippur holiday. This caused the price of crude oil to rise nearly 300 percent, which affected the global economy. In turn, consumer prices rose, and shortages were seen at gas stations.

The 1979 oil production crisis was the result of the Iranian Revolution, , which caused a shortage in the global supply of crude oil. Even though the drop in production was only about 4 percent, the global oil market dramatically reacted and raised the price of oil over the next year. This caused the price of a barrel of crude oil to more than double, which resulted in long lines and fuel shortages at local gas stations for consumers. However, one outcome of the oil crises of the 1970s was the awareness of dependence on a limited number of nations for low-cost fuel production. More emphasis was placed on exploring domestic energy supplies, energy research, and policy to mitigate inflation, as well as the importance of fuel efficiency and natural resource conservation.

The Gulf War of the early 1990s also affected gasoline. Prior to this, gasoline was in large supply and the price of crude oil was low. In 1990, Iraq invaded fellow OPEC member country, Kuwait, for reasons related to oil production. This caused the price of a barrel of crude oil to more than double. Intervention by Western nations, such as the United States, helped to restore the balance of the oil market and secure global supplies. By the mid-1990s, prices were down to their lowest ever in inflation-adjusted amounts since prices first were tracked in 1929 because the global output of crude oil increased following the war.

In 2016, OPEC+ was formed to include an additional ten non-OPEC oil exporting countries. Its goal was to rebalance and regulate the global supply, including the price of crude oil in the world market. With this addition, OPEC sought stability in the global market. However, in 2020, the COVID-19 pandemic upended the oil and gasoline market, along with many other facets of life for people. Demand for gasoline sharply decreased as people sheltered in place. To stabilize the market, OPEC instituted the largest and longest voluntary oil production adjustments in the history of the oil market.

In 2022, Russia’s war in Ukraine affected global supply and pricing. Russia is the third-largest producer of oil and supplies it to nearby European nations and China. While European nations dramatically reduced imported oil from Russia, and the United States banned it completely, China and India continued to rely on Russia for supplies.

Overview

Since crude oil is the main ingredient in gasoline, the price of a barrel of crude oil is the major factor that contributes to the price of gasoline. Included in the price of a barrel of crude oil is the cost of finding it underground, removing it from the earth, processing it in a refinery, and transporting it by pipeline and trucks. Supply and demand also affect price, and this can cause dramatic price spikes in short amounts of time. For example, in the spring of 2021, a barrel of crude oil was trading for about $64 a barrel, but a year later in the spring of 2022, it was $95 a barrel and continuing to rise. As the leading intergovernmental agency of the world crude oil market, OPEC has a regulatory effect on the global supply and the price of crude oil, but there are other factors as well, such as taxes imposed by governments. For example, in the United States, both states and the federal government levy taxes when a consumer purchases gasoline. Governments also can impose legislation to reduce carbon emissions and promote environmentally beneficial policies. This is often done to encourage the use of cleaner or more environmentally friendly fuel sources and takes the form of additional taxation that can vary by locality and governmental administration.

Taxation varies widely by country, causing large disparities in pricing from one country to another. European countries generally have the highest fuel taxes. In the United Kingdom (UK), gasoline is taxed twice with fuel duty and a 20 percent value added tax (VAT). Some countries also impose higher taxes on diesel fuel compared to gasoline. Other countries, such as the United States and Mexico, historically have lower gasoline taxes, leading to lower overall prices and higher consumer usage.

Some countries subsidize fossil fuels, , including gasoline, making it less expensive for consumers and more attractive to use. However, this discourages fuel efficiency and environmentally friendly initiatives. Also, when prices of crude oil rise, these subsidies are sometimes cut, which can cause economic problems. Countries that most commonly have subsidization of gasoline are those with large oil reserves. Historically, these have been Saudi Arabia, Iran, Egypt, Myanmar, Kuwait, Bahrain, Trinidad and Tobago, Brunei, Venezuela, Ecuador, and Bolivia.

Venezuela has historically had the least expensive gasoline in the world, as the government provided subsidies to the consumer. However, in 2016, the president, Nicolas Maduro, increased prices for the first time in twenty years. Gasoline prices at stations rose 6,000 percent amid political and economic crises. This caused the Venezuelan currency, the bolivar, to devalue, and the increases hit the already failing economy hard. As a result, the country had a major fuel shortage of gasoline and diesel fuel.

Marketing and distribution of gasoline also plays into the overall price. Oil companies must transport crude oil to a refinery and make it into gasoline, then transport it to a distribution point, finally bringing it to the consumer at a local gas station where it can be pumped into vehicles. These gas stations are then marketed to the consumer through branding, and that cost, too, is passed on to the consumer.

External factors can affect the pricing of crude oil and therefore gasoline. Natural disasters, including extreme weather and storms, war, and even the COVID-19 pandemic affected the price and use of gasoline. For example, the war in Ukraine upset the global crude oil market, since Russia is a major producer of crude oil. Because of Russia’s invasion of Ukraine, sanctions aimed at the country by other nations greatly affected price in 2022. It most strongly affected neighboring European countries, causing a shift in the balance of the global oil supply. Refinery or pipeline distribution disruptions of any kind can also affect the pricing and availability of gasoline. Drops in production or supply chain upsets can quickly deplete the stock of gasoline, and available supplies are sold by wholesalers at a higher price due to uncertainties about future supply.

Less dramatic supply and demand patterns also affect pricing and usage, such as seasonal differences. For example, during the summer months, more people drive and take vacations, which increases demand and retail price. Historically during winter months, prices at gas stations lower again in response to reduced demand. Environmental regulations can also affect seasonal gasoline price fluctuations. Some governmental regulations, such as in the United States, stipulate that gasoline sold during the warmer summer months must be less prone to evaporation. Thus, certain chemical components, which cost more, must be added to the gasoline. This cost is then passed on to the consumer.

Energy conservation initiatives aimed at protecting natural resources and helping cut environmental pollution also affect gasoline prices and usage. Since gasoline contributes to air pollution when it evaporates and is burned, it is a major factor in climate change. The focus, especially in industrialized nations that are major gasoline consumers, is to reduce reliance on crude oil and provide political and economic support to the research and development of more environmentally friendly means of fuel, such as electric-powered vehicles. However, a drop in global demand for gasoline due to an increase of alternative fuel use will also likely affect the future price and supply of gasoline.

Bibliography

“Brief History.” OPEC, 2022, www.opec.org/opec‗web/en/about‗us/24.htm. Accessed 30 May 2022.

Chilton, Chris. “Which Countries Pay the Most and Least Tax on Their Gas.” Car Scoops, 2022, www.carscoops.com/2022/04/which-countries-pay-the-most-and-least-tax-on-their-gas/. Accessed 30 May 2022.

Elving, Ron. “Surging Gasoline Prices Bring Back Memories of Past Energy Wars.” NPR, 2022, www.npr.org/2022/03/13/1086061029/gasoline-prices-political-effects-arab-oil-embargo-iran-shock. Accessed 30 May 2022.

“Gasoline Explained: Factors Affecting Gasoline Prices.” EIA, 2022, www.eia.gov/energyexplained/gasoline/factors-affecting-gasoline-prices.php. Accessed 30 May 2022.

“Gasoline Explained: Gasoline Price Fluctuations.” EIA, 2021, www.eia.gov/energyexplained/gasoline/price-fluctuations.php. Accessed 30 May 2022.

Horton, Jake, Daniele Palumbo, and Tim Bowler. “How Reliant Is the World on Russia for Oil and Gas?” BBC News, 2022, www.bbc.com/news/58888451. Accessed 30 May 2022.

Hudson, John, and Samantha Schmidt. “U.S. Officials Make Rare Trip to Venezuela, Discuss Resuming Oil Imports to Help Replace Russian Fuel.” The Washington Post, 6 Mar. 2022, www.washingtonpost.com/world/2022/03/06/venezuela-american-officials-visit/. Accessed 30 May 2022.

Perry, Mark. “Did the +26% Increase in Gas Prices during the 1930s Contribute to the Great Depression?” American Enterprise Institute, 2008, www.aei.org/carpe-diem/did-the-26-increase-in-gas-prices-during-the-1930s-contribute-to-the-great-depression/. Accessed 30 May 2022.

Richards, Heather. “What the 1970s Teaches about Today’s Energy Crisis.” E & E News, 2022, www.eenews.net/articles/what-the-1970s-teaches-about-todays-energy-crisis/. Accessed 30 May 2022.

Urpelainen, Johannes, and Elisha George. “Reforming Global Fossil Fuel Subsidies: How the United States Can Restart International Cooperation.” Brookings, 2021, www.brookings.edu/research/reforming-global-fossil-fuel-subsidies-how-the-united-states-can-restart-international-cooperation/. Accessed 30 May 2022.

Worland, Justin. “Gas Prices May Be Rising but You’re Still Not Paying for the True Cost of Driving.” Time, 2022, time.com/6160256/gas-prices-climate-cost/. Accessed 30 May 2022.