People don’t often talk about how much it costs to buy a gallon of milk at the grocery store, and yet people regularly discuss how much it costs to buy a gallon of gas at the pump. This price, whether it lowers or rises, is a common topic, and high gas prices can be pretty shocking to consumers.
Many factors go into what causes gas prices to fluctuate, and these are broken down in an easy-to-understand way by our EZ-POUR® experts.
Crude Oil Prices
It starts with the cost of crude oil, which is the largest factor. According to the U.S. Energy Information Administration (EIA), crude oil accounted for 61% of the cost of a gallon of gasoline in February 2022. Distribution and marketing, refining costs, and crude oil taxes make up the rest.
So, what determines the cost of crude oil?
Supply and Demand
Entry-level economics classes teach supply and demand because this impacts everything bought and sold. Prices rise when demand is greater than supply, and vice versa.
For example, lockdowns during the pandemic forced people to stop going places. Since demand went down, less crude oil was produced. When demand rose after the lockdown restrictions eased, there wasn’t enough of a supply, so gas prices went up.
Seasonal demand affects both crude oil and gas prices. There is more demand for gas in the summer as families go on road trips for vacation. Regulations also require the use of summer-grade gasoline, which has less evaporative emissions but is more costly to produce.
Commodities traders are individuals or businesses that focus on investing in physical substances, such as crude oil. When developing bids for oil futures contracts, they look at the current supply, future supply, and expected demand for oil. The price of oil changes daily because it depends on the trading that happens each day.
The Value of the Dollar
Oil sales are almost always done in U.S. dollars because this is the most widely used currency. If the value of the dollar significantly drops, the price of crude oil will rise so that it has the same worth on the market. Likewise, if the value of the dollar significantly rises, the price of crude oil will drop.
Since other issues and events can impact the market, traders understand they cannot directly correlate the change in the price of crude oil to the change in the dollar value.
Oil Refining Costs
Refineries purchase this crude oil and turn it into gasoline, diesel, and other petroleum products.
Refining costs vary depending on the need for seasonal blends and the region the products will be sold in the U.S; one reason is that different gasoline formulations are a requirement in reducing air emissions. Another cost is ingredients, like ethanol, that may be blended into the gasoline.
Distribution and Marketing
Gasoline is distributed by pipelines, marine vessels, rail tank cars, and tanker trucks from the refinery to large storage terminals. From there, tanker trucks deliver the gasoline to individual gas stations.
This distribution and delivery costs money, as does the cost of running a gas station, which includes paying for salaries and benefits, the rent or lease, insurance, and more. The fueling location and the owner’s marketing strategy are also factored into the price at the pump.
Plus, interruptions, such as war and natural disasters, get in the way of refining and distributing. For instance, U.S. refineries closed in August 2012 due to Hurricane Isaac, and the gas price increased to $3.80/gallon. In April 2020, the global pandemic caused the price of gas to drop to $1.77/gallon. Then Russia invaded Ukraine in February 2022, and the price of gas rose to $3.61/gallon.
Last but certainly not least, taxes are also included in the retail price of gasoline, and the tax rate varies by state. As of January 2022, the average state gas tax is 31.02 cents/gallon and the federal gas tax is 18.4 cents/gallon. Together, this makes up 49.42 cents/gallon. These taxes are typically imposed to help pay for fixing highways and other road infrastructure projects.
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