Gas Prices Truth

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Gas Prices

Gas prices are talked about every day mainly because a big part of our lives and expenses are revolved around gas prices. When gas prices rise we hear in the news and from friends that the big oil companies are gauging prices and taking advantage of the consumer. I'm hear to tell you that is not true and the farthest from the truth and no I don't work for any oil company. Here is the bottom line of gas prices, so the next time you hear someone complain about the prices and the big oil companies, you can put them in their place and give them an education.

Do oil companies control gas prices? Yes to an extend, but not as much as you think. The bottom line for gas prices is a economic fundamental concept called supply and demand. The more demand there is, the higher the price. The smaller the demand the cheaper the price. The higher the supply, the cheaper the price and the lower the supply, the higher the price. Basically it is that simple. If demand is very high and the supply level are low, the price will run up fast and very high. A good example would be summer time. We tend to drive more in the summer time, so we know the demand is high. The reverse is true if demand is low and the supply is higher, such as winter when we don't drive as much. This is why you tend to see gas price rise in summer and fall in winter.

Now that we have some basic economics behind us we need to focus our attention on who raises the prices. The prices are controlled by three groups, OPEC, the trader and the oil company. First is OPEC, they have meeting to decide if they want to lower or raise production output (supply). Usually they tend to lower the output to keep prices high and their pockets full. Next are the traders. Traders study supply and demand and then go to our open market and buy futures based on what they discovered. So if they think supply will be low and prices will go up, they will buy futures, raising what oil companies and other companies pay on the oil free market for a barrel of oil. The last group is the oil companies. If they raise their output, they can create supply. They have the hardest time controlling the prices mainly because each one is independent. Oil companies basically have to pay what the future markets tell them to pay, what the traders decided in the open market. When oil is running at high prices, you can bet these oil companies want to produce more oil because their profits will increase. Their cost are fixed, so they want to put more into the market, which in reality pushes up supply, which in return drives down price. So as you can see if anything an oil company can actually help a little when prices are rising. When prices are falling and no one is blaming the oil companies, is the time people should be watching these companies and complaining, but no one cares because prices have come down.

Here how the oil companies are taking advantage of the people. When oil rises, oil companies have to raise their prices to still make a profit, no way around it. They pay what the open market tells them to pay. When prices drop, their profit margins increase; therefore, they are much slower to lower the price at the pump because their profits margin is huge. Traders have begun to sell off because winter is coming and demand will go down, so prices go down. Below is a chart I found at AAA.com. I had a hard time finding a better chart that demonstrates my point more effectively, but you can see what I am talking about. As you can see when crude rises, so does the national average we pay at the pump. Looks like it goes up together. When crude falls, you can see the national average does come down, but not as fast or as much. Again if you really want to see the effects take a look at the open market crude prices for the past year, the futures market for gas and the national average we pay at the pump. Time and time again we can see when prices go up, everything goes up together, but when prices come down you can see the futures market comes down a lot quicker than the prices we pay at the pump. Anyone who needs help with this or finding the numbers, please contact me. I didn't want to get to in depth. My point was to show that there is no need to blame the oil companies when prices rise, we should be looking at them when prices are falling. But again this is a free market and they are entitled to set the prices how they want as long as they don't use price fixing.

One last point. Do you ever get that email that say don't by gas on Sundays or don't by gas from a certain company. Just to let you know this doesn't make any sense. First if you need gas and don't by it on one day, then you will on the next day. Either way the oil companies will get their money, just one day later. The second point is say you don't by from a certain company called "A" and you now buy your gas from company "B". Over time "B" will have a short fall and they will get excess supply from company "A" therefore company "A" gets their money no matter what happens. It just the way oil and gas prices work.

I could go on and on and get more in depth, but I don't want to bore people to bad. I just want people to truly understand how oil prices and gas prices work with big oil companies.

To found about about gas prices in your state AAA put together a great website for gas prices. Gas Prices