Gas Prices

April, 2010

Why Gasoline Prices Fluctuate

Abstract

This paper analyzes why gasoline prices are constantly changing. This study is based in information and data sets dating from the early 1990’s to current retail prices in the United States. It dissects what gasoline is made of, what we pay for, and why the price is constantly changing. It also explains why gasoline prices plummeted in 2008 after the US went into a recession.

I. Introduction

Why does the price of gasoline change from day to day? This is a question that I have thought about multiple times. I wanted to find out the reasons behind the fluctuations of the price of gasoline. The data covers prices of gasoline imported from all over the world sold in the United States dating back to 1990. The paper is organized as follows. Section II describes the components of gasoline and what each part costs. Section III explains why the price of gasoline is so volatile. Section IV relates the data to why the prices of gasoline have decreased since 2008.

II. Components of the Retail Gasoline Price

What are the key components of gasoline? What makes the price of this liquid so volatile? I will begin explaining the components of gasoline and how big of a role each piece plays. The price of gasoline has been increasingly more volatile since early 2000. This is described in figure 1. In 2008, gasoline hit its highest real price in the past 20 years at just over $3.99 per gallon of unleaded regular grade gasoline in May of 2008 and dipped as low as $1.74/gallon just 7 months later (US Energy Information Administration 2009).

Source: Author’s collection and/or calculation

I wanted to find out why gas prices fluctuate so much in such a short period of time. Retail gas prices are composed of four different variables and can be computed by the following equation.

Crude Oil + Refining + Sales/Distribution + Taxes = Retail Price

(America Online Autos 2010) Figure 2 displays the composition of the retail...