Because natural gas is a byproduct of crude oil production, oil and gas prices are frequently linked. Natural gas prices can grow in tandem with crude oil prices as demand for both fuels rises. Also, natural gas can be used in place of crude oil in some applications, so if oil prices become too high, consumers may turn to natural gas as a cheaper option.
The relationship between oil and gas prices, however, is not necessarily straight or equal. Seasonal demand, fluctuations in supply and demand, geopolitical events, and weather all have varying effects on the prices of both commodities.
The relationship between oil and gas prices, however, is not necessarily straight or equal. Seasonal demand, fluctuations in supply and demand, geopolitical events, and weather all have varying effects on the prices of both commodities.
In 2022, crude oil prices accounted for 61% of the price at the pump. About 14% of the overall cost of a gallon of ordinary gasoline went to refining, with the remainder going to distribution, marketing, and taxes.
A gallon of standard gasoline cost $4.09 on average throughout the country, down 8 cents but up $1.24 from the same time last year.
As inflation continues to increase and Russia’s invasion of Ukraine proceeds, gas prices have reached all-time highs. Russia is consistently ranked among the world’s top three oil exporters.
President Joseph Biden declared in March 2022 that the United States will ban Russian oil imports, raising gas prices. But, when the Department of Energy announced that it would begin releasing oil from the Strategic Petroleum Reserve in early April, prices began to fall gradually.
How Oil Prices Have Influenced Gas Prices Historically
During the 2008 financial crisis, oil and gas prices have been unusually volatile. The graph below depicts their relationship over time, including notable peaks and dips.
West Texas Intermediate crude oil is a benchmark for oil pricing in the United States. Since the 2008 financial crisis, crude oil prices have risen and dropped substantially based on this benchmark.
- 2022: According to AAA, the national average for petrol prices reached a record high of $4.30 per gallon in March. Because of Russia’s invasion of Ukraine, gas prices increased by $1.31 from the March 2021 average.
- 2021: Regular petrol prices averaged $2.39 per gallon in late January, rising to $3.39 per gallon in early November.
- 2020: A combination of an oil price war and a worldwide pandemic pushed the price of oil below zero in April, to roughly -$37 per barrel (/b). This unusual occurrence, however, was caused by a technical imbalance in the futures market. Speculative speculators who were long on oil but didn’t plan to take delivery caused a big sell-off of expiring contracts. Oil prices then began to rise, but the price of ordinary gasoline stayed below $2 per gallon until June, when oil prices rose to $40 per barrel. When oil prices recovered to $40 per barrel, gas prices jumped to $2.17 per gallon.
- 2015: By the end of the year, prices had fallen below $37/b, causing ordinary gas prices to fall below $2/gallon in early 2016. Over the majority of the next five years, conventional gasoline prices remained between $2 and $3 per gallon.
- 2011: In April the price of oil hit roughly $113/b. Regular petrol prices had risen to $3.96 per gallon by the following month. Oil prices stayed over $90/b for the majority of the next three years, only temporarily falling below that level in the aftermath of Iran’s threat to seal the Strait of Hormuz, a vital oil transit waterway. Similarly, gasoline prices remained consistently greater than $3/gallon for normal gas until late 2014.
- 2008: In July oil reached around $145/b. Regular gas prices rose to $4.11 per gallon as a result. By early December, oil had fallen to roughly $49 per barrel, and ordinary gasoline had fallen to $1.81 per gallon.
The Effects of Supply and Demand on Oil and Gas Prices
Oil prices are affected by supply and demand, much like most other goods you buy. Increased demand, such as during the summer driving season, results in higher pricing. Winter demand is lower since only a few northern states utilize heating oil.
Oil price futures, which are traded on the commodities exchange, also have an impact on oil prices. These prices change on a daily basis, depending on what investors believe the price of oil will be in the future. Commodity dealers play a significant role in deciding oil prices.
How OPEC Influences Crude and Gas Prices
OPEC is a group of 13 oil-producing countries that account for 36% of global crude oil production. Several countries joined together in 1960 to control the supply and price of oil.
They understood they had a finite resource. If they competed, the price of oil would be so low that they would run out sooner than if the price of oil was greater.
The first time OPEC displayed its powers was during the 1973 oil embargo. It cut off oil supply to the United States. Prices increased, shifting power away from US oil producers. A greater price would have provided an incentive for other countries to drill additional fields, which are too expensive to open when prices are low.
The United States also imports oil from Mexico, a non-OPEC member. This reduces America’s reliance on OPEC oil.
How Speculation Affects Oil and Gas Prices
Oil futures, also known as futures contracts, are agreements to buy or sell oil at a certain date and price in the future. Oil futures traders bet on the price of oil based on their expectations for the future price.Â
To establish the price, they consider predicted supply and demand. Oil prices will rise if traders believe demand will rise due to the expansion of the global economy. This might result in high oil prices even when there is enough supply.
This is known as an asset bubble, and it occurred with gold prices in the summer of 2011. That also happened in the housing market in 2005. The 2006 housing bubble burst, precipitating the 2008 financial crisis.
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