Travelers going over the river and through the woods this Thanksgiving are unlikely to be happy about gasoline prices. Gas may become a bit cheaper in the winter, however, as fewer drivers hit the road — and perhaps because the U.S. and other countries will tap their strategic petroleum reserves.
A gallon of unleaded gas costs an average of $3.40, up $1.30, or 62 percent, from a year ago, according to the American Automobile Association (AAA). Although prices are still well below their record high of $4.11 per gallon, set in July 2008, the sharp spike in the cost of gasoline has put a dent in consumers’ budgets.
Gas prices started to rise in April, around the time the Colonial Pipeline was hacked, says AAA spokesman Andrew Gross. “That’s when they began to go up, and they never really dropped — they just kept rolling along,” he says. “And that somewhat coincided with the economic reawakening here in this country [as the economy] surged faster than oil production, and it still is.”
Hurricane Ida, which hit in late August, also played a part by shutting down oil production in two-thirds of the Gulf of Mexico and nearly 80 percent of the refining capacity in the area. Much of that loss in refining capacity was caused not by damage to the refineries themselves but by the failure of the electric power grid. “People forget that you need electricity to run those places,” Gross says.
Finally, there’s the emergence of OPEC Plus — OPEC stands for the Organization of Petroleum Exporting Countries, founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. There are now 13 member countries. The “plus” part includes Russia and other large oil producers that, while not OPEC members, have been coordinating with OPEC to boost oil prices. “The thing that’s amazing is that it’s an incredibly disciplined cartel at the moment,” says Tom Kloza, head of energy analysis for the Oil Price Information Service. “It’s a real tight ship. And that has pushed up the price of crude.”
10 ways to save money on gas
No one likes to pay more than they have to, so shop around for the cheapest gas. But you can also reduce your fuel bill substantially by following these tips from AAA.
Slow down. Fuel economy drops significantly once you go faster than 50 miles an hour.
Seriously, slow down. Mashing the accelerator makes you go faster, but it drives up your gas consumption, too.
Take care of your car. When the “check engine” light comes on, it usually means that there’s a problem causing excessive emissions and, possibly, reducing fuel economy.
Take care of your tires. You’ll notice that your car stops moving if a tire is deflated. If the tires are underinflated, your fuel economy will suffer, too.
If you see a red light, take your foot off the gas and coast to a stop.
Consolidate your trips to minimize your driving.
Don’t leave the car idling in winter to warm it up. It’s unnecessary, wastes gas and also invites car thieves.
Get the junk out of your trunk. The more you haul, the more fuel you use.
Use roof racks sparingly. They can greatly decrease your mileage.
Don’t use premium fuel unless your owner’s manual says you must.
(Slightly) lower prices ahead
Gas prices fell modestly in the past week, and that may continue until refineries retool in spring for summer fuel blends. “I actually think that in the next 100 days, you’re going to get a reprieve — in other words, prices will be flat to lower,” Kloza says. Typically, demand for gasoline drops a bit in winter, and if there is another spate of business shutdowns because of the COVID-19 pandemic, demand could fall as well. The U.S. Energy Information Administration (EIA) estimates that gasoline prices will average $3.32 a gallon in November before falling to $3.16 a gallon in December.
The price of crude oil is the main factor in the price of gasoline. Crude prices have tumbled in recent weeks, from a high of $85.64 a barrel in October to about $81 a barrel now. Gasoline prices should follow — eventually. “I’ve noticed that when the price of a barrel of oil goes up, it seems like the price at the pump goes up immediately,” says Gross. “However, when the price of a barrel of oil drops, the price at the pump doesn’t drop immediately.”
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The United States is currently the world’s largest oil producer, pumping out 18.6 million barrels a day. Saudi Arabia, the number two producer, pumps 10.8 million barrels a day, according to the EIA. Despite its prodigious oil output, however, the U.S. is also the largest oil consumer, and oil prices are set globally, not locally.
On Nov. 23, on the eve of the holiday travel rush, President Biden authorized tapping a total of 50 million barrels of oil from the U.S. Strategic Petroleum Reserve. The White House says the U.S. move will be coordinated with India, China, Japan, South Korea and the United Kingdom. It's the first such coordinated effort. "That's actually kind of an interesting idea," Gross says. "And that may be behind one of the reasons why the price of crude has tumbled so much. So that that could actually help."
Beyond the price of crude, there are other significant factors in the price of gasoline. Distribution accounts for about 14 percent of the cost of a gallon of gas. You can track distribution costs by the gas prices across the country. “We have one state in the country where gas is still below $3 a gallon, and that’s Oklahoma,” Gross says. “They could literally run a garden hose to your car there.”
The farther you are from where the oil is produced, the higher the distribution costs. (A shortage of truck drivers is also driving up the cost of distribution.) Federal and state taxes account for 16 percent of the cost of gasoline, and refining costs and profits are responsible for 14 percent of the price of a gallon of gas.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.