People are always talking about fuel prices, which worry and sometimes even frustrate consumers, governments, and businesses. Locally and internationally, the cost of fuel can be a mystery as it keeps rising and falling. But this is not the case; the reasons behind the different prices of fuels are a complicated combination of economics, geopolitics, natural disasters, and speculation of the fuel market. We will talk first about the major reasons why fuel prices are unstable and what factors lead to their frequent changing in this article.
- Crude Oil Prices: The Foundation of Fuel Costs
The main point of determining the price of fuel is the crude oil.
Where do we get fuel from? -from crude oil- No matter if it is gasoline, diesel, or jet fuel, they are all made from crude oil, which is the most globally traded commodity.
The price of crude oil depends on supply and demand rules in the market. When less is supplied and more demanded, prices are now pushed up.
Various things can trigger the rise of oil prices:
Reduction of the supply: Unstable situations in oil-producing countries, nature’s wrath, or embargo might be the reasons for the supply of oil to be down.
OPEC (Organization of the Petroleum Exporting Countries) Decisions: The OPEC is an organization that controls the production of most of the oil in the world. The great influence they have on determining global oil prices is because of their decision, either to increase or to reduce the total production, respectively, pushing the price towards the opposite direction.
World Demand: The rise of an economy of countries such as China and India means that their demand for oil has also gone up, thus putting pressure on fuel prices. On the other hand, few reasons like the global recession and pandemic (like Corona virus) will collapse the demand and lower the prices to half. - Geopolitical Conflicts and Tensions
International relations strongly affect fuel prices. Political instability is the major problem facing oil-producing regions, mainly the Middle East; these areas are full of conflicts. Warfare, terrorism, embargo, and the rise of diplomatic tension leading to volatile and uneasy markets quickly worry the business participants in such a situation although these problems have not resulted in a fall already. The increase in fuel prices, in this situation, is mainly due to the stimulation and market speculation that operate in the way of fear in their interaction.
Usually, conflicts and disputes between U.S. and Iran, as well as Russia-related issues (especially since it is a major energy supplier), have made oil prices and stock market indexes to skyrocket over the last years. - Currency Exchange Rate
Since the crude oil is traded in US dollars, the worth of the local currencies compared to the dollar highly decides the price of the imported oil in different countries. For example, in case the dollar gets more powerful, the oil using community have to takeout more money from their own currency to deal with the oil trading, which is actually increasing the local fuel price. On the other hand, if a country is currency’s value is dropping, the fuel is going to be more expensive than usual even if the international price of crude stays the same. - Refining and Distribution Costs
Oil that is taken out of the ground has to go through a refining process to get the end-product that people want. Refining is usually done in a refinery and it’s complex, it’s energy or power-consuming and it is accompanied with a few significant charges. Changes in these charges can be influenced by:
The repairing or closing of the refineries
Compliance with environmental requirements that ask for a more eco-friendly and, thus, more expensive refining process
Weather changes (e.g. making summer special blends to reduce smog)
The refineries also distribute and transport the oil products from the place of production to the retailers. Thus, the changes in the transportation and storage charges (caused by strike, fuel shortage, or infrastructure damage) can lead to variations in local prices. - Taxes and Government Policies
Governments are also responsible for the price of fuel by charging them taxes and obligations. In some places, a big chunk of the money you give to buy fuel is actually the governments’ taxes. The taxes imposed can be altered depending on political decisions, environmental necessities, or economic needs.
Moreover, price restraint such as government subsidies or price ceilings that are adopted by the governments for the welfare of consumers from high prices may result in market distortion. Frequently, when subsidies cut or phase out, prices may elevate abruptly. - Market Speculation
The prices of fuel are not free from speculation in the financial markets. One of the sources of the speculation is the purchase and sale of oil futures by the traders depending on their prediction about the future supply and demand in oil markets. The recklessness of such activities leads to huge and rapid price shifts that are being explained by rumors, news, and the consequent reactions of the traders.
Even rumors and predictions, e.g., a coming hurricane in the Gulf of Mexico or slower economic growth in China, can result in a movement of prices as the traders estimate effects on supply and demand that exist at the moment are not in line with their forecast. - Seasonal Demand
The usage of fuel is not uniform throughout the year, meaning that every season has its own fuel consumption pattern. For instance;
Summer: The massive travelling certainly will lead to the soaring of the demand for gasoline as a result.
Winter: It is expected that in harsh winter conditions there will be a higher consumption of heating oil, which through time may be passed on the overall demand for fuel.
Those seasonal changes will have impacts on price fluctuations especially if refinement condition is added as a factor. - Natural Disasters and Weather Events
Natural disasters have an adverse effect not only on the production but also on the refining and transportation of oil, which in turn, lead to skyrocketing oil prices. One example would be a hurricane in the Gulf of Mexico ( the main center of oil production and refining in the U.S.), the facilities will shut down, thus, the supply will be limited and price will escalate in response, albeit temporarily, to this situation.
On the other hand, extremely cold winters or hot summers can raise the demand for energy and thus cause fuel prices to go up.
Conclusion: A Perfect Storm of Variables
Unstable fuel prices can be attributed to the numerous and intertwined factors that affect them. While it may be inconvenient and irritating for people buying the products that fuel is for, it reflects the complexity of a global commodity that is tightly related to economic, political, environmental, and market forces.
Knowing such factors will not only help the people and the enterprises to be more prepared for the changes and take the appropriate steps in adjusting their daily work but also it will emphasize the need for energy diversification, PV and wind energy investments, and strategic fuel reserves to ease the impacts of price volatility in the coming days.
