The components of the price of gas

Posted: September 16, 2012

The price of gasoline is creeping up as we head into the fall. What factors affect the price of gas at the pumps?

The price of gasoline is creeping up as we head into the fall.  What factors affect the price of gas at the pumps?  The biggest factor in the price of gasoline is the cost of crude oil, the main component in gas.  Other factors include refining, distribution, marketing and tax costs and profits.

Supply and demand of crude oil varies over time and by regions of the country.  The demand side varies with world economic growth.  The Organization of the Petroleum Exporting Countries (OPEC) plays a significant role in the supply of crude oil.  OPEC can set the upper production limit for its members, accounting for about two thirds of the world’s estimated crude oil reserves.  Political and environmental events such as wars, changes in government, and hurricanes are examples of what affects supply.  Even the Fukushima nuclear reactor that was damaged by the tsunami convinced many countries to reconsider their commitment to nuclear energy, thus increasing the demand for conventional fossil fuel sources.

Refining costs and profits can vary based on the different formulations used in different parts of the country.  The type of crude oil used, the type of processing technology used, and the cost of other ingredients that are blended with the crude oil, such as ethanol, will affect the refinery costs.  Many states require specific formulations of gas, which makes it difficult to import gasoline from one region to another.

Distribution, marketing and retail costs add to the price of gas based on location and delivery method.  Transportation to the refineries is usually by pipeline and then by tankers to local stations.   Pump prices will include the retailer’s business operating expenses. Competition of local retailers may affect prices on a local level.

Federal, state and local taxes contribute greatly to the price of gas.  As of April, 2012, the US federal excise tax on gasoline was 18.4 cents per gallon, with state and local taxes averaging 31.1 cents per gallon for a total US average fuel tax of 49.5 cents per gallon. California has the highest state tax rate of 69 cents per gallon, and Alaska has the lowest rate at 26.4 center per gallon.

Collectively, all these factors come into play in determining the price of gas at the pump.