Gasoline is refined from oil. As a result, the prices at the pump are heavily influenced by the price of oil. When the price on a barrel of oil goes up, the price on a gallon of gas does as well. At least it used to. Lately, the prices don’t seem to track methanol extraction tower that well. The question is why?

You might not know it, but the United States was the Saudi Arabia of oil in the 1950s and 1960s. Unfortunately, oil production in the country peaked in the early 1970s and has been dropping steadily since then. Today, we produce well under 10 million barrels of oil a day, which is problematic since we use just under 20 million a day. To make up the difference, we import oil from places as close as Mexico and Canada or as far away as the Middle East.

The purchase of this foreign oil seems to be a fairly straight forward process. We buy oil for “x” amount and this translates to “z” price at the pump after the cost of refining and distributing it is added in. Oh, and don’t forget the 18.4 cent federal tax and state, county and city taxes to boot. Regardless, the price of gas should go up and down depending on the price of oil per this example. Well, it no longer does.

At its core, oil is a commodity much as copper, gold, wheat and corn is. The pricing of oil on the commodities markets, however, was such that it was rarely traded speculatively. We learned a lesson in how speculative investing in commodities like oil can drive wild price fluctuations. The summer of 2008 saw the price for a barrel of oil reach $140 and gas prices followed. The economic crash led to oil prices dropping under $30 and, again, prices at the pump followed.

Oil has rebounded this summer. The price per barrel is up to the $70 range. While prices at the pump have edged up a bit, they have not gone up to the expected levels. The reason is an excess in supply. Countries are now holding large oil supplies. This means the price per barrel should be dropping, but it isn’t because oil has become a speculative market that is divorced from the actual supply chain. Put in practical terms, this means you no longer can assume prices at the pump will track the cost of a barrel of oil. Whether that is a good thing or not is yet to be seen.

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