Oil production is controlled by a very small number of powerful Middle Eastern Countries and a limited number of very powerful players sit on OPEC.
They basically decide, at their bequest (and strength of whining of the americans and West in general at that particular point, and what the americans can do for them) how many millions of barrels of oil are released onto the market.
If the supply is reduced (just to punish the americans, or play mouse with the world economy through flow through countless effects) the price of oil goes up. This in turn the petrol companies (Shell, BP, etc) decide how much petrol they are going to sell, based on their current reserves, or how much they are going to charge to the market.
This is released to all the local service stations around the country, with various alterations for local area, allowance for government exises, etc. The petrol stations, say "Station X" will buy xxx Litres, and set a price, a cent or two profit above this to go to running their store and paying the staff. A few hours pass while Station X happily sells their petrol and draws customers.
Station Y over the road seeing all these customers go elsewhere will go "ok, i'll drop my price 2c/L over these guys at Station X to get a few more customers". Station Y makes the same price at -2c/L due to increased volume and customers through the store.
Station X then realises "hey we're losing too many customers, i'll go match Y and maybe drop it by 1c". Everybody goes back to stationX.
This process ping pongs around through the day, and week, until it gets to a point where Station X and Station Y probably get to at a point that "hmm, this is silly, we're at break even point.. and if we sell too much more L that we bought at $xx we'll actually make a loss". Station Y say jacks its price up. StationX goes "hmm, well we might hold the lower price for a bit to suck the juice dry (lowest point of week), but hey, lets jack up prices up too as why lose that money when consumers are paying a massive x c/L over at Station Y?".
And hence the cycle continues, day after day, week after week, until one day the world runs out of oil, and somebody goes "oh shit".
My explanation is probably another gross simplification, but that is the basic gist as I see it. What is other people's take??