Why Are Fuel Prices So Unstable?

Tina Hampton |

Download PDF Changes in the fuel industry can cause unpredictable fuel prices.

The price of gas will always be open for discussion and to opinion.  In reality, the answer to the question of why fuel prices are so unstable has several layers that can be quite involved.

As a starting point, we know that the price of fuel is:

  1. Determined by the price of crude oil, which is used to make gasoline; and
  2. Dependent upon supply and demand.

From there, a number of other conditions can cause the market to be unstable and prices to change.

Natural disasters, such as hurricanes, affect gas prices because they take out the supply.

For example, Hurricane Katrina struck and shut down several refineries in an area (Texas, Oklahoma, Louisiana) that moves a large volume of cargo with high production.  This, in turn, affected the trading prices of crude, gasoline and diesel because how long the disruption was going to last was unknown.  As a result, rationing began and fuel distributors would not buy until the supply returned, causing an increase in price. The market reacts quickly to any changes in supply and demand.

Global demand, in areas such as Europe, Asia, Latin America and the Middle East, affect gas prices because they are all competing for the same fuel. 

Whether developing nations need more fuel or there are supply disruptions due to political instability or natural disaster; if forecasts come out that demand has gone up, then prices go up.  If there is less demand, then it keeps prices down.

Global economic health is the largest contributing factor to affect gas prices.

For example, the economic collapse of Greece.  Large banks from other European countries have loaned Greece money and US banks have issued default insurance to those banks.  If Greece does not repay its loans, the US will end up paying billions to recover losses.  There is also the fear that Greece might reject the Euro as their currency and others will follow along.  Both of these situations could have a major impact on surrounding countries and their economies.  When economies aren’t doing well, there is less demand, which can cause prices to drop.

Refinery Activity – On a more regional and local level, the recession of 2008-2009 caused prices of gasoline and diesel to drop significantly. When demand falls substantially, refineries have to make adjustments in their production and suppliers may lose profits in order to move their product. Refinery production schedules, purchasing cheaper crude to capitalize, and overproducing when there is lower demand, all affect prices as well.

The bottom line is this – oil is a global commodity.  It is hard to get and expensive to produce.  Even without all of these other conditions and events, gas prices can be affected simply by how oil is traded.  While we may see trends and patterns, price stability for any length of time is likely out of the question.

The good news is that working with a fuel distributor can reduce the impact price fluctuations may have on your business.  They know the industry and have the knowledge and expertise to help make purchasing decisions that will best suit your needs.  It’s stability you can count on!