Gasoline Prices on the Rise: What's Driving the Increase?

Gasoline prices have been on a rollercoaster ride in recent years, and as of late, they are trending higher. The recent increase in gasoline prices can be attributed to a variety of factors, including the cost of crude oil, refining costs and profits, distribution and marketing costs and profits, and taxes. As of December 31, 2024, the cost of crude oil was the largest component of the retail price of gasoline, accounting for 53.9% of the average retail price of $3.95 per gallon. This is consistent with historical trends, where the cost of crude oil has been the single biggest contributor to the retail price of gasoline.



Refining costs and profits, distribution and marketing costs and profits, and taxes also contribute to the retail price of gasoline. In 2022, refining costs and profits accounted for 17.7% of the average retail price of gasoline, distribution and marketing costs and profits accounted for 12.4%, and taxes accounted for 17.1%. These factors have also been significant contributors to gasoline price fluctuations in the past.

The recent increase in gasoline prices can also be attributed to the global energy crisis and the response to the Russian Federation’s invasion of Ukraine, which has accelerated momentum behind the deployment of a range of clean energy technologies. This has led to a significant boost to clean energy investment, with more than USD 1.7 trillion going to clean energy in 2023. However, the increase in fossil fuel investment expected in 2023 is unevenly spread around the world, with less than half the cash flow available to the oil and gas industry going back into new supply.

Current geopolitical events and global supply dynamics significantly influence the trajectory of gasoline prices. As of December 31, 2024, the price of gasoline per gallon was $3.00, reflecting a 40% decrease from its 2022 peak of $5.01. This decline is partly due to the global supply situation, where oil supplies outpace demand, and the U.S. economy is strong while other major oil users like China and Europe face economic challenges, leading to lagging global oil demand.

The Organization of the Petroleum Exporting Countries (OPEC+) plays a crucial role in managing oil production and prices. Concerns that OPEC+ may boost production to add to an already solid supply situation have contributed to the recent volatility in energy prices. For instance, in late 2024, energy sector stocks experienced significant volatility, gaining more than 6% in November before retreating by nearly 10% in December. This volatility is partly due to market responses to the environment for energy prices, reflecting concerns about potential supply increases.

The incoming Trump administration's indications that it supports increased U.S. oil drilling could also result in more supply, which isn't necessarily beneficial for oil companies who would prefer higher oil prices rather than a supply glut. This potential increase in supply could further impact gasoline prices by increasing the overall supply of crude oil, which is the largest component of the retail price of gasoline.

Additionally, geopolitical risks in the Middle East and Ukraine could lead to rising oil and global natural gas prices, especially if production from key producers like Iran, Saudi Arabia, United Arab Emirates, Qatar, or Iraq is disrupted by regional security issues. For example, if the Trump administration takes a more hawkish stance on Iranian oil exports, it could elevate political tensions in the Middle East, potentially disrupting oil supplies and driving up prices.

On the downside, weakening global economic growth, particularly in the U.S. or China, could lead to slowing demand for oil and natural gas, which could put downward pressure on gasoline prices. However, longer-term investments in energy production will be needed to meet rising oil and gas demand in the coming years and decades.

In summary, current geopolitical events and global supply dynamics, including OPEC+ production decisions, the Trump administration's policies, and geopolitical risks in the Middle East and Ukraine, significantly influence the trajectory of gasoline prices. Potential disruptions in oil supplies due to geopolitical tensions or changes in production policies could further impact prices in the near future.