why do gas prices change every day?
In: Economics
Look into the futures market. Futures are contracts that stipulate a certain number of barrels to be sold on a certain day at a certain price. These futures contracts allow oil producers to get price certainty – if you’re farmer, you’d rather shake hands on a price for 100 cows rather than having the price change every day. The same goes for oil producers. If you bought an oil futures contract, you have committed to buying and taking delivery of the barrels. But, you can sell the contract to someone else. Maybe a Saudi Arabian facility blows up from a Yemeni drone, there will be a supply shock and oil prices go up. Your contract is now more valuable, and you can sell it for profit. The person buying from you has now taken the commitment of buying and taking delivery of the oil. If the Saudis repair their facility at record speed, the price of oil will fall again and that new buyer will lose money. Or you can just be United Airlines and you found a contract whose oil price looks like a deal and you can hold it to delivery. United Airlines doesn’t care if the price goes up or down because the contract has a price engraved in stone. The producer still uses the price of the initial contract.
Every nanosecond the prices change because of algorithmic (robotic) trading. These prices will ripple down the supply chain, finally ending up at the gas station. Prices are just supply and demand, and future anticipation of supply and demand. These change ALL the time.
Latest Answers