The Memorial Day holiday traditionally marks the start of summer, when Americans take to the highways and the airways for holidays and vacations. Vacationers traveling by personal vehicle also typically find higher prices when they fill up with gasoline this time of year. Dr. Cristian Harris, an associate professor in the Department of Political Science and International Affairs who teaches courses in international political economy and other topics, explains the global factors that affect domestic gasoline prices. Harris also oversees the University of North Georgia's online Master of Arts in International Affairs program.
How does the price of crude oil determine the cost of gasoline?
The price of crude oil is the single most important component in determining the price of gasoline. There are four components behind what drivers pay at the pump: first, crude oil prices; second, refining costs and profits; third, distribution, transportation, and retail costs and profits; and, finally, federal and state taxes. The U.S. Energy Information Administration estimated that 63 percent of the retail price of regular gasoline in March 2013 was as a result of the price of crude oil. While the price of crude oil varies according to the time of the year and the region of the country, it is the main factor behind the price of gasoline.
How can international events affect costs?
Although the Memorial Day holiday is the informal start of summer travel and higher retail gasoline prices in the U.S., price fluctuations also result from worldwide supply and demand factors. Since 2008, the weak state of the global economy, militant attacks in Nigeria's oil region, natural disasters in Asia, political instability in North Africa and the Persian Gulf, and geopolitical tensions in the Middle East have had significant influence on the price of crude oil. Additionally, as developing countries in Asia become wealthier, transportation use, particularly in China and India, is increasing global oil demand. Even the value of the U.S. dollar in international markets is important. Since crude oil prices are quoted in U.S. dollars, a falling value will drive crude oil prices higher.
Why does the cost of gasoline vary around the world?
Gasoline prices around the world are affected both by supply and demand factors and government decisions. Governments can affect the cost of gasoline through taxation, subsidies and price caps. For example, European countries tax gasoline very heavily; sometimes it accounts for more than half of the retail price, thus driving prices higher. In other cases, such as in Venezuela, governments keep gasoline prices low through subsidies. Governments may also regulate the price of gasoline by fixing it by decree. Other intervening factors are connected with production and transportation costs including refining capacity and distance from the exporting to the importing market.