How Gas Prices Work

OPEC and Gas Prices Around the World

The single largest entity impacting the world's oil supplies is the Organization of the Petroleum Exporting Countries (OPEC), a consortium of 13 countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Together, these 13 nations are responsible for 40 percent of the world's oil production and hold the majority of the world's oil reserves, according to the Energy Information Administration (EIA). [source: EIA]. When OPEC wants to raise the price of crude oil, it simply reduces production. This causes gasoline prices to jump because of the short supply, but also because of the possibility of future reductions. When oil production dips, gas companies get nervous. The mere threat of oil reductions can raise gas prices.

In April 2001, OPEC decided to reduce its collective production by one million barrels per day. This was at the same time that American consumers saw gas prices rise, hitting an average high of $1.71 per gallon on May 14, 2001.

OPEC increased its production in June 2005, when it raised to 28 million barrels per day with an increase of 500,000 barrels per day pending changes in oil prices. In September 2005, it made all of its member countries' "spare output" available, an estimated 2 million barrels per day. However, in November 2006, OPEC again reduced its rate of production by 1.7 million barrels per day to keep the price from falling below $50 per barrel [Source: Joint Economic Committee ]. OPEC's production for the second quarter of 2008 was an average of 36.87 million barrels per day [source: EIA].

Beyond OPEC, there are several other countries that contribute to the world's crude-oil supplies, including the United States, Mexico, Canada, Equatorial Guinea, Russia and China. In April 2008, the United States imported approximately 1.8 million barrels of crude oil per day from Canada [source: [Energy Information Administration]. OPEC tracks the oil production of these nations and then adjusts its own production to maintain its desired barrel price.

Cause and Effect
Numerous forces can influence the price of gas at the pump, but fuel costs are only one part in the vast web of global economics. Gas prices have an impact on other parts of the economy as well. You're already aware of the immediate effects of rising prices - that feeling of stunned disbelief as the numbers climb and climb while you fill your tank. There are secondary effects as well. You might decide against a long road trip because the gas would cost too much. When it comes time to buy a car, you might decide against a gas-guzzling SUV and find something with better mileage instead.

Let's look at the big picture. Does a hike in gas prices lead to inflation in the overall economy? It could, as long as the increase is a steady, long-term rise in prices. Expensive gas means it's expensive to ship products by truck, expensive to drive long distances and expensive to fly in airplanes. All those costs mean the cost of virtually any product you can think of will go up if gas prices stay high.

However, economists don't look at gas prices as a leading indicator of inflation. The price of oil, along with food costs, are far too volatile -- that is, they are easily influenced by things like weather, labor strikes and wars. The costs swing up and down, depending on world events. To watch for inflation, economists keep their eyes on the core Consumer Price Index, which is a measure of the cost of certain goods, like DVD players, hotel rooms or college textbooks, which stay more stable in the short term.