The price of crude oil directly
affects the price of gas in the U.S. more than any other factor. It also
represents the largest percentage of what you pay for gas. Other factors
include distribution costs, refining costs, federal and state taxes, and corporate
profits. While these costs contribute a smaller percentage, and vary from state
to state, they are also more stable. The crude oil market tends to be unstable
and its volatility is affected by three main influences: Oil futures traded on
the commodities market, supply and demand, and global political events.

            Speculating
investors can drive up the price of crude oil. Speculators buy and sell oil
future derivatives, which are basically bets on the value of a barrel of oil at
a future date, on the commodities market (NYMEX, ICE). When speculators flood
the market with money buying derivatives then the price of crude oil goes up
sharply. There was a sharp increase in the price per barrel of crude oil from
July 2004 to June 2008. On July 8th, 2004, the price per barrel of
crude oil was $31.61 which is not very expensive. That price correlated with
the average gas price per gallon in the U.S. of $1.93. By June 2008 the price
per barrel of crude was $143.68 and a few weeks later the price of a gallon of
gas jumped to $4.17. Originally the sharp increase was thought to be due to several
different factors, but that opinion has changed. “Most analysts now realize
that the sudden increase to oil prices was due to increased investment by hedge
fund and futures traders” (Amadeo, 2017).

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            Another
factor which can raise the price of crude oil is supply and demand. When demand
is greater, such as in the summer, prices will increase due to the need for
increased production to keep up. Prices can also go up if supply gets low due
to emergency or disruption.

 

                           FACTORS AFFECTING CRUDE OIL PRICES                                       3

The U.S. stores 700 million barrels of crude oil in
Strategic Petroleum Reserves. The Strategic Petroleum Reserve (SPR) is the
world’s largest supply of emergency crude oil. These federally-owned oil stocks
are stored underground in salt caverns along the Gulf of Mexico according to
the Department of Energy website. At the time of Hurricane Katrina in August of
2005, the U.S. oil production was severely disrupted. To make sure the country
had enough oil and natural gas, the Department of Energy used 30 million
barrels of crude oil from the SPR. That briefly caused the price of oil to go
to $70.00 per barrel due to fears that there may be a longer-term shutdown and
to increase production to replenish the supply of the SPR.

            The third
influence on crude oil prices is global political events. In 2012 Iran
threatened to shut off access to the Strait of Hormuz which is a choke point
between the Persian Gulf and the Arabian Sea. “The waterway is bordered on the
north by Iran, and its closure could cut off access to 20% of oil shipped
around the world, sending fuel prices skyrocketing” (Alpert, 2012).

The U.S. sent ships to the region and there were threats
going back and forth between countries for months. When the first credible
threat came out in January it had a significant impact on crude oil prices as
many feared that Iran may follow through and halt oil shipments at least for a
significant amount of time. “U.S. crude oil prices are at their highest levels
since May 2008, hitting $109.77 a barrel. U.S. oil prices climbed nearly 6%
this week. In turn, the average price of a gallon of gas jumped more than 13
cents” (Farrell, 2012).