According to the Energy Information Administration [EIA], total consumption of crude oil was projected to decrease by 3.3% in 2009. While this was good news for environmentalists, the sky-high price of gasoline is still a concern for many drivers.
As a daily commuter, I am constantly trying to predict whether or not gas prices are going to rise or fall so that I only pump gas when the price is at its lowest. This fight is one which makes me wonder—especially with gas prices fluctuating so much this summer—what factors go into determining the price of a gallon of gas?
According to the EIA, every time you pay for a gallon of gas, you are not only paying for the price of crude oil (61% of cost), but also federal and state taxes (15%), refining costs and profits (15%) and distribution and marketing (10%).
Retail gasoline prices fluctuate mainly because of crude oil prices and the level of supply relative to demand. Because of the strong and increasing demand for gasoline in the U.S. and throughout the world, there is a limited supply which increases the price of gas.
Prices usually rise slightly in the spring and peak in late summer when people drive more and then drop in the winter. According to the EIA, good weather and vacations cause U.S. summer gasoline demand to average about 5% higher than the rest of the year, causing gas prices to increase by 10-20 cents from January to the end of summer.
Price of Crude
Crude oil prices are determined by worldwide supply and demand which is why as countries around the world develop rapidly, the demand for and price of gas increases rapidly. Natural disasters and Political conflicts in major oil producing regions such as Saudi Arabia, Iran and Iraq can also affect the price of gas. The Organization of Petroleum Exporting Countries (OPEC) also has significant influence over the price of crude oil because its members produce over 40% of the world’s supply of oil and own more than two-thirds of the world’s estimated oil reserves. Because OPEC members want to maximize their profits, it is often in their best interest to limit the production level as much as possible.
Proximity of Supply
States further away from the Gulf Coast (where almost half of the gasoline in the U.S. is produced) tend to have higher oil prices because they are also paying for the cost of transporting the gas from the refinery. Because of this, gas is often higher on the West Coast and near the Rocky Mountain region.
Gas is often more expensive in areas with few retail gas stations or in areas with low traffic. Areas with a concentrated number of states may offer lower prices because they are competing with each other for customers. However, in many large cities such as Chicago, prices may increase as you get closer into the city because of higher taxes and other factors.
Some states, such as California, have additional regulations and charge extra taxes on top of the national tax and requirements. Some states also put restrictions on fuel transportation and storage. All of these factors increase the cost of producing and distributing gasoline.
Some retailers also try to maximize their profits by raising prices during peak times. Some states have moved to regulate such practices.