Gas Prices, Petrol Prices, Gas Price, Petrol Price

By: EconomyWatch   Date: 30 April 2010

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EconomyWatch

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Becoming familiar with the components that affect petrol prices makes it easier to understand price swings and the retail pricing of petrol. This includes the forces supply and demand, exploration, processing and logistics issues, taxes and political volatility. At times, even temporary maintenance at refineries or oil pipelines can reduce oil supplies and lead to sudden surge in a region’s local gas and petrol prices.

 

 

What Drives Gas Prices?

The processing of crude oil includes:

  • exploration of sources
  • drilling of oil wells
  • transportation to refineries
  • maintenance of reserve capacity of the source of fuel

These four stages constitute 54% of the price of petrol. Refining costs are rising as they need to meet stricter environmental standards, and now amount to 16% of gas prices. Transportation, retail operations and marketing (‘downstream’ activities) add 10% to the cost, with the final 20% being made up of local and state government taxes.

 

Gas Prices: Factors Responsible for Price Fluctuations

Fluctuating gas prices are due to several factors:

Taxes: Many state governments levy taxes that amount to about 20% of the cost at gas stations. Some countries (such as Turkey and Norway) impose taxes as heavy as $5 per gallon on gas and petrol. Also, a rise in taxes impels a decline in the consumption of gasoline. As a result, the global price of oil decreases. This is one of the major reasons behind the failure of alternative energy sources in expanding their market share.

Natural Reserves of Crude Oil: Those natural reserves of crude oil which were easier to get have already been used. The cost of extracting the remaining harder-to-get oil is higher than the already exploited reserves. The quality of crude oil has reduced further and led to an increase in prevailing costs for refining the oil.

Political Turmoil: Supply uncertainties and volatile political issues in countries such as Iran, Iraq, Venezuela and Nigeria triggers grave concerns about the regularity of supply. Consequently, other oil producing countries increase their prices as they guarantee continuous supply.

Gas and Petrol Prices: Demand and Supply

Fluctuations in gas and petrol prices happen due to the market forces of demand and supply. For instance, in 2005, the Hurricane Katrina wiped out major refineries and hindered drilling operations on the Gulf Coast. Gas prices skyrocketed due to the sudden change in the balance between supply and demand. Consequently, gas prices were hiked across the world.

Most countries now agree, at least in principal, that stable supplies of renewable energy are needed. This shift in approach is not only to preserve the environment, but also to ensure a sustained supply of energy. This will help in tackling the pressure on prices of gas as the reserves deplete further.


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