- Crude oil and gasoline prices tend to move in lockstep
- However, this high-correlation relationship isn’t perfect
- Factors like refining and distribution costs play into the price of gas at the pump
Source: Laura Gangi Pond / Shutterstock.com
There’s one pesky question so many investors are dealing with right now: Why are gas prices so high?
Every investor is also a consumer, and seeing higher gas prices at the pump is perhaps the most visible sign of inflation we have. It’s a cost that we monitor, and often try to manage, as it impacts our pocketbooks directly and immediately. It’s also a cost consumers can’t get away from, baked into everything from direct transportation (i.e. commuting to work) to the price of goods (everything needs to be shipped on a plane, truck or train) and even input costs on “renewables” such as hydrogen or electricity production.
Thus, when energy prices go up, so too does the price of everything else.
However, when we’re talking about gasoline prices relative to the price of crude oil, there’s sometimes a disconnect. Even during periods where crude oil prices come down, gas prices can remain persistently high, or even move higher.
So, what gives?
Let’s dive into some of the big factors behind the price of gas investors may want to keep in mind.
Why Are Gas Prices So High Right Now?
There are many factors that drive gas prices, other than crude oil itself. While the price of crude makes up roughly 60% of the finished cost of gasoline, there are other factors baked into the price of this finished product.
Besides taxes, which vary from state to state (and include a federal tax which President Joe Biden may pause), refining and distribution costs make up a big chunk of gas prices. Refiners, like most businesses, maintain profits on a supply and demand basis. With supplies of crude oil relatively low and consumer demand high, refiners are capturing a greater profit margin in this environment.
On the supply side of the equation, there’s still some lingering effects that are driving these lower supplies of oil. Oil-producing companies have complained about a lack of workers in oil fields for some time. Demand for workers has driven skilled labor to other, higher-paying parts of the economy. Thus, higher wages on the production side are filtering down to the end consumer.
Let’s not also forget that the pandemic led to sub-zero crude oil prices, which resulted in companies cutting back on production. Idled wells can’t be brought back online instantaneously, and drilling and production capacity hasn’t come back online to pre-pandemic levels yet.
So, it’s a complex problem. For now, consumers are paying for the complexity in the form of high prices at the pump. That said, over time, the market will come into equilibrium, one way or another.
How long that takes is a whole other question.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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