The price of crude oil is the largest factor in determining the price of gasoline, but the two do not necessarily move in lockstep. To understand the relationship between the two, it’s helpful to begin by examining factors that affect the price of oil.
For most commodities, pricing is determined by the basic law of supply and demand. When supply is greater than demand, prices go down. But as demand approaches or surpasses supply, prices go up. It’s a little more complicated with oil, however, because prices are determined in part by futures contracts. That is, an oil buyer agrees to pay a certain price for a certain amount of oil on a certain date in the future. Both the buyer and the seller hope to profit or at least protect themselves from a sudden change in the market.
The Organization of Petroleum Exporting Countries, or OPEC, also plays a role in the pricing of oil. Comprised of the top 12 oil-producing nations, OPEC is responsible for nearly 80% of all of the oil reserves on earth. The nations work together to control the oil market by controlling supply, that is, how many barrels of oil they agree to sell per day.
Other factors affecting oil prices include the quality of oil being sold and the cycling trend within the commodities market. Historically, the oil market has peaked every thirty years. Experts note that trends are descriptive rather than predictive, however, and caution against relying too heavily on them in making investment decisions.
While the price of oil has a significant effect on the price of gasoline, the effect is not immediate. In fact, it takes about six weeks for gas prices to catch up to changes in oil prices. In addition, oil prices tend to fluctuate more dramatically than gasoline prices, which never rise quite as high nor fall quite as low.
While oil and gas prices tend to move in the same direction, if not quite at the same time, at times their price trends seem to diverge. In April of 2011, the U.S. experienced a notable gap between falling oil prices and rising gas prices. Check out the following resource for an in-depth analysis of that situation.