How is the price of gas, oil and electricity set in the United States? What factors are involved?
Mainly supply and demand affect the rise or fall of current price of energy products, but a change in the price of inputs also plays a role. Here’s a look…
The modern world runs on energy either to produce electricity or to power motor vehicles. Many factors go into how the price is set for what we have to pay at the pump or on our electricity bill.
Although there is a push to find more sustainable ways to move our cars and power all the things we depend on in our daily lives, fossil fuels still play an outsized role. The price of the raw material, whether crude oil or natural gas, influences how much you pay down the line as a consumer.
How the price of crude oil is set
The US is the world’s largest producer of crude oil representing around 20 percent of worldwide production. However, it consumes more crude oil than it uses despite becoming net exporter of petroleum. That means that production from other countries that put their oil stocks for sale on the world market can have more influence on the price.
Although OPEC pumped roughly 40 percent of crude oil out of the ground in 2020, the cartel represents about 60 percent of the market in petroleum traded internationally. The Organization of Petroleum Exporting Countries sets targets for production by its members states to actively control the price of oil on the world market.
Greater production in the US up until the covid-19 pandemic helped to dampen upward price pressure. The pandemic saw a glut of oil on the market causing crude oil prices to drop and with it pumping from low profit margin US wells. However, the US Energy Information Administration (EIA) forecasts production will rise again reaching 12.6 million barrels per day in 2023 surpassing 2019 levels.
The cost of gasoline is most affected by the price of crude oil
Gasoline is one of many derivatives of crude oil and the cost of the raw material is the largest component of the retail price you pay at the pump. But other factors play a role from the expense of refining, distribution along with state and federal taxes. The region of the country where you live will also have a hand in affecting the price based on all the before mentioned factors.
Anytime there is a disruption anywhere along the chain it can decrease supply yet demand doesn’t change. The seasons also play a role in affecting the price of gasoline at the pump. In the summer months, prices tend to be higher as more Americans hit the roads despite producers building up surplus to meet the increased demand.
How the price of your electricity bill is set
Fossil fuels accounted for over 60 percent of utility-scale electricity generation in the US in 2021. Natural gas was the largest portion of the total share at close to 40 percent. The US became the world’s largest producer of natural gas in 2014. Still the price is determined by the global market with expected supply and demand influencing the spot price for purchases.
The three main factors that set the price you pay for your electricity bill are generation, distribution and transmission. Generation of electricity is the single biggest factor at 56 percent of the average cost in 2020 according to EIA. But other factors like weather conditions and regional regulations can change how much you pay to power your home and everything inside and out.