Supply and Demand of Gas Prices 1

Supply and Demand of Gas Prices

Hyrum Orton

Salt Lake Community College

Supply and Demand of Gas Prices

Majority of US citizens, if not all of them, rely on gasoline. Whether it is used to

traveling from one destination to another or work a lawn mower, gasoline is a necessity for most

Americans to live comfortably. It is common for consumers to compare gas prices in order to

save money for other goods. What then contributes to price fluctuations of gas prices? By

looking at the supply and demand of gasoline, we can understand different factors that cause gas

prices to either rise or fall.

Supply is the amount of a good or service that can be produced for consumers. With

limited resources on the earth, producers need to understand what consumers demand. Their goal

is to provide a good or service that is highly demanded by consumers and sell it at a price that

meets equilibrium. Equilibrium is where supply and demand meet on a graph and satisfies both

the producer and the consumer. If equilibrium is not met, there can be either a surplus or

shortage of supply. Gasoline is a high demand for most consumers, however the supply of crude

oil can determine where prices will be for gas.

“Crude oil is created through the heating and compression of organic materials over a

long period of time” (Editorial department, 2009). This crucial source for gasoline is found

underground and can be accessed by drilling into areas where crude oil is located. Although

crude oil is consumed globally, not many countries produce it. “The top five oil producing

countries are: Saudi Arabia, Russia, United States, Iran, and China” (Editorial department, 2009).

These five countries produce majority of the oil used throughout the world. This shows there is a

high demand for crude oil in the world, yet the prices are more determined by the supply of

crude oil. If there is a low supply of oil, prices will increase and demand may decrease if they

cannot afford the price. If there is a surplus in crude oil, prices will decrease and the demand will
Supply and Demand of Gas Prices 3

increase. Crude oil is the greatest factor in pricing gasoline, yet there are other factors that still

have high contributions towards price.

A common factor that contributes to prices of gas is the time of the year. According to the

Federal Highway Administration, the average American in the US drives 13,476 miles a year

(OHPI, 2018). A good portion of miles come from traveling on vacations for holidays and in the

summer. Producers understand that the demand for gas will be high during these times, this gives

them a reason to raise prices. They do not need to worry to much about consumers forgoing gas

during this time and their competitors are likely to do the same.

Weather can also affect prices in gasoline. When the spring time hits, there will begin a

trend in gas prices rising. This is due to the warm weather. “In warmer temperatures, government

regulations require different gasoline formulas, which are better for the environment. The

additives required for the summer formula increase the production costs for refineries” (Bennett,

2015). This also can affect gasoline companies to produce less gas than normal. The lack of

supply will increase prices in gas in order to meet equilibrium.

Where gas stations are located is another factor for pricing. If there are many gas stations

near each other, there will be a high competition for consumers. They will need to compete with

each other to find the best price for attracting more consumers. This is also why gas stations that

are placed far apart have more flexibility in their prices. Typically, the more gas stations

available have lower prices than those stationed farther apart.

Gas stations located in a highly populated area have more opportunities for customers.

This will increase the demand for gas in a specific area. However, highly populated areas usually

provide public transportation. If consumers decide to use public transportation instead of driving,
Supply and Demand of Gas Prices 4

this can harm lower the demand of gas stations nearby. The location of gas stations also depends

on refineries to deliver their gasoline. The distance of the refinery to the gas station can also

affect gas prices. Either way, location is important for determining the supply and demand of gas

prices. (Bennett, 2015)

To conclude, by understand the principle of supply and demand, you can better

understand why gas prices fluctuate over time. After learning the importance of supply and

demand, you can understand the different factors that can cause a shift in supply or demand. The

main factor that can affect gas prices is the production of crude oil. Other factors include summer

time travels, hot weather, and location of gas stations. Each of these cause prices to rise or fall in

gas and can be understood with knowledge of how supply and demand work.
 Supply and Demand of Gas Prices 5

Sources

Administration, F. H. (2018, March 29). Average Annual Miles per Driver by Age Group. Retrieved

from https://www.fhwa.dot.gov/ohim/onh00/bar8.htm

Bennett, J. (2016, October 18). Behind the Signs: Factors That Affect Gasoline Prices. Retrieved

from https://www.stlouisfed.org/publications/inside-the-vault/spring-2015/behind-the-signs

Dept, E. (2018, June 08). What is Crude Oil? A Detailed Explanation on this Essential Fossil Fuel.

Retrieved from https://oilprice.com/Energy/Crude-Oil/What-Is-Crude-Oil-A-Detailed-

Explanation-On-This-Essential-Fossil-Fuel.html