Kitchen Table Economics

What’s Up with Gas Prices?

Just like the price tag on a carton of eggs or gallon of milk, gas prices are often used as a barometer to gauge the cost of living. Everyone has been in a conversation where someone has said something like, “have you seen the price of gas lately?” No wonder. Americans fill-up their vehicle at the pump 50-times, on average, every year.

The price at the pump is constantly fluctuating. Since the year 2000, the average price of gas across the U.S. has been as low at $1.04 per gallon and as high as $4.05. Gas costs are currently experiencing an upswing—jumping nearly 30 percent since the beginning of the year. Question: What causes the price to change so much?

Just like any other good or service, price is dependent on supply and demand. During the pandemic, Americans cut down on unnecessary travel, which translates to lower demand for gas and therefore cheaper prices. But as the economy recovers and residents re-engage with society, consumer demand and prices are climbing in parallel. Families need to fuel up the minivan for the annual cross country road trip that may have been postponed in 2020.

World events can also temporarily influence the price of gas. For example, a giant container ship recently got stuck sideways in the highly-trafficked Suez Canal and is blocking other transports. The “roadblock” of sorts has disrupted trade—including oil tankers—and will likely pressure fuel prices to rise.

In addition to typical market mechanisms, broader, more political shifts in energy policy threaten to inflate prices further. Efforts to discourage oil-extraction techniques like fracking will weaken domestic oil production. As the supply of gas, a byproduct of oil, falls, prices will climb.

As Benjamin Franklin famously commented, “in this world, nothing is certain except death and taxes.” Perhaps the inevitable conversation with your neighbor about high gas prices should be added to that list. At least now you understand the basics of why costs at the pump rise, or fall.