Crude oil is processed at a refinery where it is transformed into useable petroleum products. The average cost of crude oil to U.S. refineries (referred to as the "composite refiner acquisition cost") greatly affects the final cost of petroleum products. The composite refiner acquisition cost peaked in 1981 at $35.24 per barrel. Two dramatic energy-related events of 1990 and 1991 caused a slight fluctuation in crude oil prices: the war in the Persian Gulf, which entailed the loss of Iraqi and Kuwaiti oil, and the dissolution of the Soviet Union, the world's leading oil producer. In 1990, as a result of the Persian Gulf crisis, the average cost of crude oil rose to $22.22 per barrel. Prices declined steadily until 2000. The yearly average cost of petroleum in 2003 was $28.50 per barrel.

Motor gasoline constitutes about half of the total volume of products produced from crude oil. Retail motor gasoline prices generally follow the same pattern as crude oil prices; however, prices fluctuate widely and are based on supply and demand conditions. Data from EIA indicate that taxes and factors other than the cost of crude oil account for more than half of the price paid by the consumer for a gallon of motor gasoline.

Environmental concerns have played a key role in changing the formulation of motor gasoline. The phaseout of lead in motor gasoline was brought about by a series of 1970s initiatives aimed at reducing emissions. By 1990, leaded motor gasoline represented only 5 percent of total motor gasoline sales and had been replaced almost entirely by unleaded motor gasoline. Refining processes have been changing in order to produce high octane unleaded motor gasoline, and in response to tighter restrictions on motor gasoline volatility (RVP), which became effective in 1989. Oxygenates, such as methyl tertiary butyl ether (MTBE), and gasoline set forth in the Clean Air Act Amendments of 1990 (CAAA) will make these additives increasingly important in the future.

The CAAA also imposed new requirements on producers, transporters, and suppliers of distillate fuel oil. Those requirements included standards for fuels designated for on-highway use of a maximum sulfur content of 0.05 percent by weight and a minimum octane level of 40. Further, these fuels must also be colorless to clearly designate them for on-highway use. Other diesel or distillate fuels will be dyed blue. The restrictions were designed to combat emissions of sulfur dioxides and to assure the ignition performance of the diesel fuel meets the American Society for Testing and Materials standards for combustion. The CAAA standard took effect October 1, 1993, and affects about 46 percent of the total domestic demand for distillate fuel, or about 9 percent of total U.S. petroleum demand.

Distillate fuel oil is a general classification for one of the petroleum fractions produced in conventional distillation operations. It is used primarily for space heating, on- and off-highway diesel engine fuel, and electric power generation.

No. 2 distillate includes No. 2 fuel oil and No. 2 diesel fuel. Currently these products are physically similar; however, No. 2 diesel fuel intended for use in passenger cars is blended with kerosene to increase its liquidity during cold weather. The cost of this process, in addition to Federal, State, and local motor fuel taxes, partially explains why No. 2 diesel fuel prices are higher than those for No. 2 fuel oil.

The average U.S. sales price of No. 2 fuel oil sold to residential consumers for heating was 119.4 cents per gallon in 1981; it then declined to 80.3 cents per gallon in 1987 and rebounded to 106.3 cents per gallon in 1990, further declined to 87.6 cents per gallon in 1999, and rose to 135.6 cents per gallon in 2003. The price data for No. 2 diesel fuel are for sales through company-operated retail outlets, include low sulfur diesel fuel only, and do not include taxes. In 2002, the price of No. 2 diesel fuel averaged 112.9 cents per gallon. The sales price of No. 2 diesel through company-operated outlets has been consistently lower than No. 2 fuel oil prices but, when taxes are added, diesel is more expensive for the consumer.

Residual fuel oil is the heavy, viscous oil that remains after the other fractions have been distilled off in the refining process. It is used for generating electricity, for space heating, for industrial purposes, and as fuel for ships. The average refiner's price of residual fuel oil to end users peaked at 75.6 cents per gallon in 1981. The average price was 65.6 cents per gallon in 2003.

In the late 1970s, prices of most petroleum products were subjected to Federal Government price control regulations. On January 28, 1981, all remaining product and crude oil prices were decontrolled, establishing a free market for petroleum pricing. Refiner, distributor, and retailer pricing decisions for petroleum products are now based on the operation of a free market economy and may, therefore, differ not only from region to region, but from State to State, and even from one area to another in the same State.

More information on this subject can be found in the following EIA publications: Monthly Energy Review, Annual Energy Review, Petroleum Marketing Monthly, Petroleum Marketing Annual, and Weekly Petroleum Status Report.