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Understanding Increasing Gas Prices, and Examining the Effectiveness of Gas Rewards Credit Cards
(Updated 08/15/2012) Each year gas prices tend to rise in the summer and decrease in the winter. Although this pattern is considered the general rule, every now and then we experience a shift in gas pricing that deviates from the normal order of things; that's what we've witnessed in the past 10 months or so.
In 2012, Americans have seen, in the late winter months, gas prices shoot unusually high for this time of year. And then during the start of summer, not even Memorial Day or the 4th of July, two times of year seemingly specifically designed for $4.50 gallon gas, could reverse the 13 weeks of consecutive declines in prices. The forces behind this rare turn of events are fairly well defined, but not well known to most people, and include factors related to the Stock Market, demand for fuel, and refinery issues.
Early in 2012 (specifically, February) refinery problems, particularly shut-downs, altered normal functionality of the U.S. refinery system. This resulted in a swift and sharp reduction in the supply of gasoline on both the East and West coasts. The immediate response was a quick up-tick in fuel prices in those affected areas, followed by a gradual increase in prices across the Midwest, as suppliers bought the cheaper gasoline from areas not impacted by refinery outages to sell on the coasts. The end result was an average $.75/gallon increase, across the country, during a one-month period in late winter and early spring (a time of year when gas prices are traditionally low and predictably stable). Last week Northern California experienced a fire at a large refinery that's responsible for producing a large amount of gasoline for the West Coast. The results so far have been a $.20-.30 spike in prices in just five days.
Demand for Oil
Although industry insiders were prepared for this winter- and spring-time surge in prices, consumers were surprised by such a large deviation from the typical routine. As a result, the consumer response to the “unexpected” increase in prices was to drastically cut the amount of fuel used. In some areas of the country demand for gasoline fell nearly 10 percent, an impressive feat in such a short period of time. And because the United States consumes roughly a third of the world’s oil supply, a decline in U.S. consumer demand for fuel decreased overall worldwide demand for oil. While demand was falling between February and July 2012, oil production continued to rise, eventually creating a glut of the stuff, a scenario that is uncommon for the gas and oil industry during the summer months.
In fact, global oil reserves were so high earlier this month that a situation called “contango” occurred, in which the current cost of oil storage, along with the current price, became worth less than its future price. The result of this was that oil traders were encouraged to buy oil in bulk, because they could buy it at cheaper prices, and then store it for sale at a later date, when their profits would be greater. This has led to a decrease in the overall oil reserves and a slight increase in oil prices, causing them to rebound back in line with futures prices.Gas Prices and the Stock Market
Oil prices are also tied, to some extent, to the stock market. When the market climbs, so do oil prices, and vice versa. The reason this occurs is because lower stock prices are symptomatic (or at least thought to be representative) of declining economic activity, which translates into lowered oil demand and consumption. And in the last few months, America’s tepid growth, slowing expansion in China, and worries about debt in the Europe, have depressed markets worldwide, as well as the projected demand for oil. All of these factors have combined to stifle oil prices in recent weeks (even with production still offline in several countries), although it remains to be seen what affect a strike in Norway may have on prices in the near future.
Prices Ruled by Basic Economic Forces
Understanding the factors affecting gas prices can require a complex analysis, but ultimately prices are essentially governed by very basic economic principles, with a few “monkey wrenches” thrown into the market, for good measure. Thus, oil prices (and as a result gas prices), may spike and slump temporarily, but in the long run both are fundamentally constrained by market forces that trend towards the status quo.
Can a Gas Rewards Credit Card Help?
When gas prices climb many consumers want to know whether a gas Rewards Credit Card can really help them save money in the long term. Realistically, the answer is “maybe.” When market forces and unforeseen incidents drive up demand and prices, using a rewards credit card can certainly help you to save anywhere from 2-5 percent back on your purchases. So the central question is if these savings are enough to justify other costs that may be associated with credit card use (like annual fees, interest charges, and other expenses that lower a cardholder’s return on investment). For consumers that drive a great deal, and/or operate a vehicle with poor fuel efficiency, a gas card can save up to several hundred dollars per year. These cards are truly ideal for these types of commuters, and small businesses with vehicle fleets. However, for the average driver, the margin for error (between what you pay and what you’re getting in return) is much narrower, and any rewards credit card should be managed carefully and used strategically.
Know How to Best Use Your Card
It’s important to fully understand the terms and conditions before signing up for any Credit Card Offer. For example, how much will it cost you in surcharges and fees to maintain your new card? If you’re not sure you will be a high consumer of gas in the future, does the rewards credit card you’re considering include additional perks that make the card useful in the long-term, and for more than just fuel? Are there caps to how much you can spend and earn that will limit the card’s money-saving effectiveness? Ultimately, it’s important to consider all of these factors when selecting a new credit card. Over time, for the right consumers, Gas Credit Cards may offer great savings, regardless of the current price of gasoline in your area.
Are you experiencing pain at the pump, or on alert for the next spike in prices? Consider one of these Top Gas Rewards Credit Cards to help you start saving:
by CreditQ Staff
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