Global demand for crude oil has been increasing steadily for the past century, particularly in the past few years triggered by extensive economic growth of China and India. Since no oil giant made new oil discoveries in recent years, oil prices continued to rise and oil consumption continued to outgrow production. The price of gas (petrol) is determined primarily by the price of crude oil. A recent EIA study shows that when gas prices hit their peak of an average US$4.06/gallon in July, more than US$3/gallon was used to pay for crude oil.
When the prices were so high, there were plenty of days when pumps were losing money. The oil companies were the ones who benefited the most and made the money. The reason oil prices drop down so fast was because of a drop in demand for oil caused by conservation and the weak economy. People reduced consumption when prices were record high, and have failed to increase consumption thereafter. Usually, demand for a product increases when its price decreases, but in this case the energy-saving habits people developed to save money continue to persist even with lower costs. The economic meltdown and an uncertain economic outlook is adding to the tough times that is cutting down spending all around.
Gas prices are not falling as fast as oil prices because no one wants to sell at a loss. When oil prices started dropping, the refineries still had oil they had bought for a higher price, and the gas station still had the gasoline they bought from the refineries at a higher price. The refineries only started to lower their prices when they had to start buying new oil at the reduced price, and the gas stations only started lowering their prices once they needed to buy new gasoline from the refineries. Gas stations have had to slash profit margins to stay competitive as oil costs increased, with hopes of selling more gasoline as prices dropped to recoup some losses. However demand never picked up, and oil refineries are losing money on gasoline. The growth of alternative energy has hurt refineries and an overall decrease in consumption is hurting both stations and refineries.
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