If you've ever been interested in learning about the economy, now is the time.  As our country and many others are weathering the biggest storm in economic history, the average consumer is certainly feeling the waves!  With the rising costs of everything from groceries to auto insurance , we Americans are beginning to pick up our heads and take notice of what is happening.  More and more, we are taking an interest in learning how some major world processes affect our everyday life.

Of the ups and downs of the current climate, one “up” that is most easily spotted is the price of fuel.  Prices of gas for our cars have skyrocketed, of course, making us think twice about driving out of town for vacation.  That's just the tip of the iceberg – home heating oil, manufacturing, electric power generation, the cost of the food that's delivered to the grocery store – these things are all affected by the price of the fuel we use.  Since our daily lives are affected in many more ways than we can even know, it may be good to get a bit of a grasp on how the economics of it all works.

There are a few factors that go into figuring the price of fuel.  Taxes and distribution, which generally remain stable components, account for about forty-five percent of the cost of your vehicle's gas.  The remaining fifty-five percent is directly linked to crude oil prices.  Since taxes remain steady for long periods of time and sudden disruptions to distribution lines are not foreseeable, crude price at the pump rises and falls... and rises, and rises... closely in keeping with the projected cost of crude oil.

The main determiners of the prices of crude oil are called oil “futures”.  Oil stocks are traded based on contracts to buy and sell barrels of oil at a specific price on a specific date in the future.  Every day, traders in oil bid based on a projection, or a guess, of what price they think oil will be trading at in the future.   The projections are based on calculations of supply and demand, taking into account all of the world's usage and OPEC's production rate.  With these trade projections being re-evaluated daily, the price of crude oil, and therefore the price of the gas we use, fluctuates daily.

This type of futures trading can lead to a self fulfilling prophecy; if oil prices are thought by traders to be on the rise, traders will raise the cost of oil by raising their own bids.  This type of “bubble” is a phenomenon which is not unique to oil prices, but can be seen in any other type of commodity trading.  Lately, this driving up of oil prices has been one of the biggest factors of current high fuel prices.  Although there is not a shortage of supply, and demand has gone down, oil traders have been driving up the prices of futures.

Automotive article was posted on Wednesday, June 17th, 2009 at 3:23 pm and is filed under Recommended. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.