Explainer: What key factors influence gasoline prices?
In the United States, the cost of gasoline has been a hot topic of conversation lately, as prices hit record highs.
The national average now stands at $5.00 per gallonand by the end of the summer, this figure could grow to $6 per gallonaccording to JPMorgan estimates.
But before we can get a sense of what’s going on at the pump, it’s important to first know what key factors dictate the price of gasoline.
This graph, using data from the US Energy Information Administration (EIA), describes the main components that influence gas prices, providing the proportional impact of each factor on the price.
The four main factors
According to the EIA, there are four main factors that influence the price of gas:
- Crude prices (54%)
- Refining costs (14%)
- Taxes (16%)
- Distribution and marketing costs (16%)
More than half of the cost of filling your tank is influenced by the price of crude oil. Meanwhile, the rest of the price at the pump is split fairly evenly between refining, marketing and distribution costs, and taxes.
Let’s look at each factor in more depth.
crude oil prices
The most influential factor is the cost of crude oil, which is largely dictated by international supply and demand.
Despite being the world’s largest oil producer, the United States remains a net importer of crude, with the majority coming from Canada, Mexico and Saudi Arabia. Due to America’s reliance on imports, US gasoline prices are heavily influenced by the global crude oil market.
A number of geopolitical factors can influence the crude oil market, but one of the biggest influencers is the Organization of the Petroleum Exporting Countries (Organization of Petroleum Exporting Countries).OPEC), led by Saudi Arabia.
Established in 1960, OPEC was created to combat US dominance of the world oil market. OPEC sets production targets for its 13 member countries, and historically, oil prices have been linked to changes in OPEC production. Today, the OPEC countries are responsible for about 60% of the oil traded internationally.
Oil must be refined into gasoline before it can be used by consumers, which is why refining costs are factored into the price of gas.
The exact cost of refining varies, depending on a number of factors such as the type of crude used, the processing technology available at the refinery, and the gasoline requirements in specific parts of the country.
In general, refining capacity in the US has not kept up with the demand for oil. Several refineries closed during the pandemic, but even before COVID-19, refining capacity in the US lagged behind demand. Incredibly, no new refining facilities have been built in the country. since 1977.
In the US, taxes also play a major role in determining the price of gasoline.
Across the United States, the average gas tax is $0.57 per gallonhowever, the exact amount fluctuates from state to state. Here’s a look at the top five states with the highest gas taxes:
|Range||Condition||Gas tax (per gallon)|
*Note: figures include state and federal taxes
States with high gas taxes generally spend the extra money on improvements to their infrastructure or local transportation. For example, Illinois duplicate its gas taxes in 2019 as part of a $45 billion infrastructure plan.
California, the state with the highest gas tax, expects to see a rate increase this July, which will push gas prices up around three cents per gallon
Distribution and Marketing Costs
Finally, distribution and marketing costs affect the price of gas.
Gasoline is normally shipped from refineries to local terminals via pipelines. From there, the gasoline is further processed to ensure it meets market requirements or local government standards.
Gas stations then distribute the final product to the consumer. The cost of operating a gas station varies: some gas stations are owned and operated by brand-name refiners like Chevron, while others are smaller-scale operations owned by independent dealers.
Big brands run a lot of ads. According to Morning Consult, Chevron, BP PLC, Exxon Mobil Corp., and Royal Dutch Shell PLC ran TV ads in the US for more than 44,495 times between June 1, 2020 and August 31, 2021.
How does the conflict between Russia and Ukraine affect gasoline prices in the US?
If only A fraction of US oil comes from Russia, why is the conflict between Russia and Ukraine affecting prices in the US?
Because oil is bought and sold in a global commodity market. So when countries put sanctions on Russian oil, that reduced global supply, ultimately driving prices up.
This supply shock could keep prices high for a while unless the US slips into a recession, which is a growing possibility based on the trend of recent data.