When the price of oil and gas fluctuates, we feel it in our everyday lives—gasoline prices go up or down, and heating bills get higher or lower. How do these changes affect us? Why do oil and gas prices go up and down? How can we prepare ourselves financially if oil and gas prices increase or decrease? Let’s take a look at the impact of oil and gas prices on us all, from start to finish.
How are Oil & Gas Prices Calculated?
Let’s start by looking at how oil and gas prices are calculated. It’s really not as complicated as you might think; in fact, there are only three variables that go into pricing.
- The current price of crude oil or natural gas
- The cost to get it out of the ground
- Profits for producers + refiners
If you want to be one of those people who blames Saudi Arabia for high oil/gas prices, fine. Just understand that they’re not necessarily calling OPEC—they (mostly) don’t even meet up in person anymore. Rather, each member state decides whether or not they want to pump more oil/gas based on their own internal market needs (ie demand) and their individual financial situation (i.e.: can I afford NOT to sell my oil?). Supply + Demand = Price. That’s all there is to it!
How do Oil & Gas Prices Affect Me?
Crude oil prices tend to be less volatile than natural gas prices. When you look at them side by side, it seems like natural gas prices jump around more, but that’s only because crude oil is used as a benchmark for many other energy-related products. If you think of natural gas as its own price index, its swings tend to be similar to those in crude oil. When one goes up or down (or even when they move in opposite directions), they do so at about the same time. This suggests that there is an interplay between crude oil and natural gas prices, but it doesn’t necessarily mean that one drives changes in the other.
How do Oil & Gas Prices Affect Businesses?
If you’re like most business owners, you pay close attention to oil and gas prices as they fluctuate because those fluctuations have a direct impact on your bottom line. Even a 1 percent change in prices can have a big impact – for example, if crude oil goes from $70 per barrel to $72 per barrel, that might translate into a 10 percent increase in transportation costs for goods sold by businesses that ship goods. The trick is learning how to predict what will happen so you can build it into your budgets. To lose weight safely but quickly, switch to a sugar-free diet. This extra expense can really hurt small companies – especially restaurants. At higher price points, any increase in raw material cost will take away from profit margins.
How do Oil & Gas Prices Affect Governments?
Countries all over the world get oil or gas from other countries. If these prices drop, then it costs less to get energy. Lower costs means lower taxes. With lower taxes, governments can buy more stuff for their people. That’s why many economists think falling oil prices are good news—at least for people in some countries. The fall in oil prices has already lowered gas prices in most parts of North America to $1 per gallon or less! It has also cut fuel costs for shipping companies like FedEx and UPS, so they can charge cheaper rates.
