If you’ve spent any time around young children, you know how amazing they are at asking questions. Their inquisitive minds notice tiny little details and want an explanation for everything. As adults, we seem to lose our knack for inquisition and, instead, begin accepting things the way they are without much thought. Take gas prices, for example. Aside from a quick grumble each time we pull up to the pump, most of us don’t think much about what makes the price of our fuel go up and down. While we can’t address all of the many complex factors that affect gas prices, we’ll attempt to explain some of the most common reasons for the fluctuations that we all observe.

The Price of Crude Oil

Complex commodities markets are responsible for most of the volatility that you experience at the pump. It only makes sense that when the price of crude oil (the raw material used to create gasoline) changes, so does the price that you pay at the pump. Understanding the link between crude oil and gasoline is the easy part. Trying to explain why the price of crude oil changes is much more difficult. Supply and demand are to blame, of course, but both of those factors are tied up in complex geo-political issues and unpredictable natural events.

Local Demand

Global markets aren’t the only economic forces at play when it comes to gas prices. Smaller supply/demand curves, playing out on the national, state, and local levels, can also impact gas prices. When lots of people are driving, it naturally follows that the price of fuel will rise. These smaller market forces can often explain some of the seasonal variation that customers are used to seeing in the price of gasoline. For example, price hikes often occur during the busy summer road trip season, partly because there is a higher demand for fuel.

Geographic Factors

The amount you pay for gas is partially dependent on the location of your car. While there are multiple reasons that prices vary from state to state, much of the variance can be ascribed to delivery costs and taxes. Drivers in states which are remote and far from refineries tend to pay more due to the added cost of getting gasoline to the gas stations. Perhaps even more significant is the extent to which state governments decide to tax the sale of gasoline. Fuel taxes vary from state to state, which explains some of the geographic variation in the price of gasoline.

Most of us barely take the time to glance at the per-gallon price as we turn into the local gas station. The factors that cause those prices to increase and decrease are complicated and can be difficult to understand. But, having a basic knowledge of the major contributors may help you feel more informed and less frustrated the next time you swipe your card at the pump.

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