How Oil and Gasoline Prices Actually Work

Gas prices—and therefore oil prices—wield a tight grip on the American consumer psyche. No other commodity’s prices are tracked so closely, advertised so prominently, and hold such significance in the minds of the American people as gas prices. It is also a market few people understand. 

When gas prices are low, people are pleased, or at the very least do not complain about gas prices. But when gas prices are high—which everyone immediately knows because they’re posted in giant signs at hundreds of thousands of public locations across the country—people get mad, politicians react to that anger, and lots of hemming and hawing is done.

Recently, President Biden has taken to blaming oil companies for “padding their profits” by artificially increasing prices. The main point Biden and other folks calling out the oil companies make is that at the peak of the 2008 oil shock, a barrel of oil was going for about $132 a barrel and gas prices hit a high of $4.15 in the U.S., but now oil has peaked at around $103 a barrel—about $30 less than in 2008—but gas is going for $4.41 per gallon, almost 30 cents more than in 2008. Sen. Elizabeth Warren is reviving the idea of a new tax targeting oil profits. A CBS/YouGov poll showed most Americans are willing to accept higher gas prices for the time being, but a vocal minority is blaming Biden. 

Politicians getting upset about rising gasoline prices are about as predictable as the sun rising in the east,” R. Tyler Priest, an energy history professor at the University of Iowa, told Motherboard. So too, he added, are consumers getting upset at politicians for rising gasoline prices.

What this cycle, repeated decade after decade since the 1970s, typically omits is any kind of rational discussion about how oil prices actually work. Motherboard spoke to two energy policy experts and one energy historian to figure that out. And while they disagreed on some matters, there were a few common threads they found frustrating about popular discourse around gas prices. Mainly, all the finger-pointing s completely disconnected from how oil markets work, what can be done to ease the pain at the pump, and how to prevent such shocks from happening in the future.

Kenneth Medlock, the senior director at the Center for Energy Studies at the Baker Institute at Rice University, put it bluntly: “Blaming each other for sudden, unexpected movements in price, especially on the heels of a pandemic recovery and now a war in Ukraine, is just patently false.”

Who controls oil prices?

At some point in their lives, most people learn some version, no matter how rudimentary, of the supply and demand curve. At some later point in their lives, nearly all of those people conclude none of that applies to oil markets, which are, they claim, manipulated by politicians, or a cartel of Western oil companies, or OPEC, the Organization of the Petroleum Exporting Countries, with 13 members mostly from the Middle East and Africa.

But that is a mistake, Clark Williams-Derry, an energy analyst for the Institute for Energy Economics and Financial Analysis, told Motherboard. He said oil markets are much closer to the classic version of Economics 101 with the supply and demand curves than, say, iPhone prices, where Apple decides what an iPhone costs and theIn contrast, “Oil prices are set, basically, by a bunch of buyers and a bunch of sellers who are engaged in a nonstop auction for oil,” Williams-Derry said. And the market is volatile and fickle. “Small imbalances between supply and demand, even just a percent or two, can push prices all over the place, because nobody wants to be the refiner that doesn’t have enough oil.”

It is true that OPEC, for example, can still manipulate prices in the oil markets by choosing not to release spare production capacity, Medlock said, which is often, but not always, a matter of diplomacy between OPEC members and the U.S. But this type of dynamic—in which a single or small group of companies have some ability to manipulate prices in their market due to their size—is hardly unique to oil markets, as researcher Matt Stoller has extensively documented in his newsletter about monopoly power in global markets. But the oil market is still sufficiently competitive that “padding profits” in the traditional sense, Medlock said, would be difficult to do.

The upshot, Williams-Derry said, is that “people I think have this idea that oil is the same way [as the iPhone], that there's some company out there, like some person like in Saudi Arabia, or in Venezuela or in like some office in Houston is saying the price is ‘x.’ But when you look at how it actually works, the price is set surprisingly like in a free market.”

What can presidents and other politicians do to lower gasoline prices?

Essentially nothing. Releasing reserves—about 582 million barrels as of February 22—is a tiny drop in the proverbial bucket that the oil market will barely register, considering global oil demand is about 100 million barrels per day. Leasing more federal land for drilling has the same issue and also suffers from the lag problem; it takes time to start drilling a place that previously was not being drilled, and by the time that is done, the drilling may not even be needed anymore, a risk oil companies know and will therefore be hesitant to buy the lease for in the first place. The vast majority of drilling in the U.S., Williams-Derry said, is done on private land oil companies already own.

“Politicians take too much credit and are assigned too much blame for things that are happening in oil markets,” Williams-Derry said. 

Medlock agreed, saying the “false accusations” that oil prices are somehow directly related to short-term political decisions lead to “blame-shifting,” but that at the end of the day “it is really all about supply and demand, but that is a boring, apolitical story