Volatility
Gasoline prices have been extremely volatile in the U.S. during the past two years. The price volatility in the cost of gasoline has sparked a heated debate about the nation’s energy security and our dependence on imported oil. Greater insight into the factors surrounding how gas prices are determined will give way to a better understanding of how to form a viable solution to the problem of high gasoline prices.
Factors that contribute to gasoline prices
When consumers purchase gasoline at the pump, they are paying for a range of costs. The cost of production and distribution to consumers includes the price of crude oil to refiners, refinery processing costs, marketing and distribution costs, as well as the retail station costs and taxes. Consumer prices may also reflect the profits and occasional losses of refiners, marketers, distributors and retail station owners.
In 2004, the price for a gallon of regular grade gasoline consisted of the following: 12 percent for marketing and distribution; 18 percent for refining costs and profits; 23 percent for federal and state excise taxes; and 47 percent for the cost of crude oil. However, the representation of crude oil costs in the retail price of regular grade gasoline may differ somewhat over time and among different regions in the country.
Fluctuations of taxes, refining and distribution costs can also adjust the price of gasoline. For instance, extra local county and city taxes may be levied in addition to the federal and state excise taxes. The refining component may vary regionally due to the different formulations required in different parts of the country. Moreover, some retail gasoline stations are owned and operated by refiners while others are independently owned businesses that purchase gasoline for resale to the public.
Thus, the price on the pump accounts for both the retailer’s purchase cost for the product and the service station’s operating costs. The gasoline price may also reflect local market conditions and factors, such as location and the owner’s marketing strategy. However, many consumers do not realize that retail markup does not necessarily comprise the largest part of gasoline prices.
Sources: U.S. Energy Information Administration, Federal Trade Commission, CNNMoney.com