Nib asked, and Nib — askNib's tutor — drew the answer live at a whiteboard. This is the spoken transcript; enable JavaScript to watch it drawn.
how does supply and demand affect gas prices
You fill up, and the pump says about three dollars ten a gallon, the 2025 U.S. average. Who decides that? Surprisingly, not the station.
Follow one dollar. About fifty-two cents is crude oil, fifteen is refining, sixteen is delivery and the station's cut, and seventeen is taxes.
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.
Here's the market. Higher price, buyers want less: demand slopes down. Higher price, sellers offer more: supply slopes up. They cross at today's price.
Now supply shrinks: a refinery shuts, a war disrupts oil, stockpiles run low. The supply curve slides up and left, so the crossing climbs.
Why so jumpy? Drivers barely flinch. One study of 2001 to 2006 found a ten percent price rise cut gas use by under one percent.
Real life shows both sides. In April 2020 lockdowns emptied the roads and a gallon fell to one seventy-seven. By June 2022, war and thin stockpiles pushed it just over five dollars.
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.