Motor gasoline accounts for an important share of all the energy consumed in the United States, and it is no surprise that gasoline prices receive a lot of attention. The Energy Information Administration has developed A Primer on Gasoline Prices to clarify the factors that contribute to gasoline prices and their fluctuations.
The primer begins with a discussion of the four main components of the retail price of gasoline:
- Refiners' cost of crude oil
- Refiners buy crude oil from U.S. and foreign suppliers and turn it into many different petroleum products, including gasoline. Refiners paid an average of $17.46 per barrel of oil in 1999, and at that time crude oil accounted for about 37 percent of the cost of a gallon of regular gas (see figure below). This percentage can vary over time and from place to place.
- Refining costs and profits
- Besides the purchase cost of oil, refiners incur many other costs as well - for operations and maintenance, capital, employee wages and salaries, and so on - and they also must make a profit. In 1999 these additional costs and profits amounted to about 13 percent of the cost of a gallon of gasoline.
- Taxes
- Federal, State, and sometimes county and other local taxes make up a significant share of the price of gasoline at the pump, with Federal and State taxes alone accounting for 36 percent. Federal excise taxes are, of course, uniform across the country, at 18.4 cents per gallon. State excise taxes vary but average about 20 cents per gallon. A few States also levy sales taxes on gasoline.
- Other cost factors
- Finally, getting the gasoline to the 180,000 gas stations in the United States and then to motorists incurs additional distribution, marketing, and retail costs and profits. Most gas stations are operated by independent dealers, who set their own prices in response to their operating costs, local economic conditions, and other circumstances.
While gasoline prices in general can be explained in terms of the above factors, additional factors must be considered to fully explain why prices fluctuate over time. For example, gas prices normally change with the season. Because demand tends to rise about 5 percent during the peak driving months, prices generally follow suit, rising before and during the summer (typically about 3.5 cents per gallon) and then falling again in the winter.
One of the most potent forces determining gasoline prices is international political developments that affect crude oil supply and demand. For the last 40 years, the members of the Organization of Petroleum Exporting Countries (OPEC) have sought to use their strength as the suppliers of almost 40 percent of world crude oil (and holders of two-thirds of estimated reserves) to control oil prices. In one of the latest examples of this influence, OPEC's 1999 decision to cut production contributed significantly to the recent rise in U.S. gasoline prices (see figure, below). Other examples of geopolitical events that triggered oil shortages and drove gas prices up include the Arab oil embargo of 1973-74, the Iranian revolution in 1978, the 1980 Iran/Iraq war, and the Persian Gulf war 10 years later.
Imbalances between the supply of crude oil or gasoline and the demand for them can also affect prices. For example, the rise in crude oil prices mentioned above was aided by increased demand in Asian nations in 1999, as those economies began recovering from an earlier downturn.
The price of gasoline is subject to the same forces. If gasoline demand rises quickly, or supplies cannot keep pace because imports are low or refineries are not producing at normal levels, then the price of gas will rise as stocks are drawn down and wholesale dealers bid up the price of replacement supplies. Gasoline is more vulnerable to ups and downs in price than many commodities, in part because demand is somewhat inelastic. That is, motorists can drive less in response to high gas prices, but few can switch to another fuel.
Finally, gasoline prices may also differ from one locale to another, for a variety of reasons. Differences in State and local tax rates, discussed above, are one reason. Another is proximity of supply: how far an area is from refineries. Prices tend to rise with distance from the Gulf Coast, which is the source of nearly one-half the gasoline produced in the United States. The extent of local market competition can make a difference as well, with prices likely to be lower when many competing suppliers are concentrated in an area.
Environmental requirements can also cause regional variations in gas prices. Certain State and Federal laws designed to reduce air pollution require that gasoline sold in some areas of the country be chemically modified to reduce motor vehicle emissions that contribute to carbon monoxide, smog, or toxic air pollutants. These special requirements typically raise the cost of making the gasoline. The pump price of the "reformulated" gasoline required in some cities runs about 3 cents per gallon higher than that of conventional gas, and about 5 cents per gallon higher in California. The price difference is greater in California because its standards are stricter than the Federal standards that apply elsewhere. Gas prices in California also tend to be more volatile than in other States because in-State refineries are hard pressed to meet demand and there are few refineries outside the State geared to provide California's unique blend of gas. Demand surges or supply shortfalls therefore usually tighten supplies and drive up prices.
A Primer on Gasoline Prices, DOE/EIA-X040; tri-fold color pamphlet.
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File last modified: August 24, 2000