Mar 2, 2015

Ever wonder what is behind the fluctuating price of fuel?

The price of retail fuel follows the same pricing model as many commodities, the model is supply and demand. There are a few outside government influences like taxes and regulations that keep the price of fuel from being completely dependent on the free market.

Even with the outside influences, the price of fuel still follows the supply and demand model pretty closely. Looking at these two variables separately you can start to see some logic that is driving the current pricing.

The “supply” in one sense is easy to understand, there is definitely more oil available today than there has been in the past. OPEC is releasing more oil on the market and there are new domestic sources (like oil from hydraulic fracturing). According to sources like Bloomberg and the Wall Street Journal, OPEC partners like Saudi Arabia are not planning on changing their policies any time soon. Oil will still be coming on the market despite the current glut. Inventories of crude oil are at high points worldwide. As the supply for a given good increases the price begins to fall, we have been witnessing/enjoying this phenomenon at the pump for the last 6 months. According to the U.S Energy Information Administration, you get 12 gallons of diesel or 19 gallons of gasoline from a barrel of oil. This explains some of price differentiation between gasoline and diesel, the increased supply of oil doesn’t have as great an impact on the price of diesel as it has for the price of gasoline.

The “demand” for gasoline has actually declined a little bit in the last couple of years. People are driving less; this is not the case for diesel. The demand for diesel has actually increased the last couple of years. This is partly due to the increased trucking demand and partly due to the other uses of diesel remaining at a high demand (ie. Diesel as a heating fuel).

The supply and demand influences on the price of fuel are not projected to change anytime soon. The projection is for fuel prices to be stable for the next 5 – 6 months.

If you are like me, you didn’t realize how much money you were spending on fuel.  Enjoy your savings, and hopefully you have a bit of understanding where that savings is coming from.

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