Over the past two years, the price you’ve paid for a gallon of gas has ranged from an average of $1.60 to $4.11. To use an economic term, that’s nuts. While the Arab oil embargo, the Iranian revolution, and the Gulf War, not surprisingly, provoked big price jumps at the pump, not one of those events caused a two-year round trip as dramatic as the one we’ve just seen. And the geopolitical drama that caused the most recent spike, sending the price of a barrel of crude up to $145 on July 4, 2008? Well, there wasn’t one. So why did gas prices leap 100 percent in 12 months only to plummet to $30 on December 23, and then more than double, to a recent peak of almost $75 on August 21? And how much will it cost you to fill up your tank in the coming years?
What’s Driving Prices
There are four major factors that determine oil prices — supply, consumption, financial markets, and government policies. What has happened is that what have historically been the fundamental factors in pricing the barrel — supply and consumption — are no longer in the driver’s seat. So this year, for example, there has been abundant supply and slowing demand, but prices have doubled. Economics 101 says that shouldn’t happen. But it has.
“In today’s world, oil-price dynamics are different than even 10 years ago,” says Kenneth Medlock, an energy economist at the Baker Institute at Rice University in Houston.
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