Nib asked
How does supply and demand affect gas prices?
The pump price is mostly a world crude oil price, and because drivers cannot easily cut back, a small change in supply moves it a lot.
8 steps, drawn by Nib. Read it here, or watch him draw it. Updated .
1the pump
In 2025 a gallon of regular gasoline averaged about 3.10 dollars in the United States. Most of that price is set far from the gas station, in the world market for crude oil.
The 2025 U.S. average for a gallon was about 3.10 dollars.
2where it goes
The Energy Information Administration splits the pump price into four parts. Averaged over 2016 to 2025, crude oil was about 52 percent, refining costs and profits 15 percent, distribution and marketing (including the station) 16 percent and taxes 17 percent.
About half the pump price is the cost of crude oil.
Which part is the biggest share of the pump price?
Show the answer
Crude oil, about 52 percent on average over 2016 to 2025.
3what moves
Taxes hardly move; the federal part is a fixed eighteen point four cents a gallon. What swings the price is crude oil, and that is supply and demand.
4the market
Demand slopes down: the higher the price, the fewer gallons buyers want. Supply slopes up: the higher the price, the more sellers will offer. The price settles where the two curves cross.
5supply shrinks
Now supply shrinks: a refinery shuts, a war disrupts oil, stockpiles run low. The supply curve slides up and left, so the crossing climbs.
6steep demand
Economists call this inelastic demand. A study by Hughes, Knittel and Sperling estimated that from 2001 to 2006 a ten percent rise in price cut US gasoline use by well under one percent, because people still need to get to work. A steep demand curve means a small change in supply makes a big change in price.
A 10 percent price rise cut gas use by under 1 percent in 2001 to 2006.
Why does a small supply shortage move gas prices so much?
Show the answer
Because drivers cannot cut back much, so demand is steep and the price has to climb a long way.
7real swings
The average US price of regular gasoline was 1.77 dollars on April 27, 2020, when lockdowns cut driving sharply. It began 2022 at 3.28 dollars and peaked at 5.01 dollars in June 2022, after Russia's invasion of Ukraine, sanctions and low gasoline stockpiles squeezed supply.
Gas fell to 1.77 dollars in April 2020 and hit 5.01 dollars in June 2022.
8the whole idea
So the pump price is mostly a world oil price. When supply shrinks or demand grows it rises; when demand collapses it falls, and steep demand makes it swing.
Next time the number changes at the pump, ask what happened to supply, and what happened to demand.