Pricing of Gasoline

Gasoline remains a primary commodity in U.S. consumers maintaining their current quality of life, to the point where severe price fluctuations have devastating impact to the American economy, the lifestyles of its people, and the politicians. The typical person observes and is impacted by these seemingly random changes in price, but has little, if any, understanding of the forces at work that impact the price of gas at the pump. First some basic facts to establish a context for the discussion:

• According to the Motor and Equipment Manufacturer’s Association (MEMA), Americans drive 3 trillion miles per year.
• The Department of Energy estimates that the U.S. consumes in the order of 20 million barrels of oil products per day, half of which is used for gasoline to fuel motors.
• Approximately 178 million gallons of gasoline is consumed in the U.S. per day.

Fluctuations in Gasoline Prices

The option of significantly cutting back on the use of gasoline appears unreasonable. That said, in better understanding the factors that impact price, we arm ourselves with the information to modify our use, or at the very least, plan for fluctuations in price.

• Summer Holidays (e.g. Fourth of July, Memorial Day and Labor Day) equate to spikes in the demand for gas, which usually translates to increases in gas prices.
• Catastrophic weather events such as hurricanes and tornadoes will temporarily drive gas prices up, particularly if they wreak havoc on oil tankers, off shore drilling platforms and coastal refineries.
• As the world crude oil market tightens, lowering inventories, gas prices will increase as will they when demand exceeds the refinery capacity, especially while performing maintenance during the spring.
• Military conflicts in areas close to oil supplies can create challenges in drilling and transporting crude oil, thereby driving the prices up.
• All of the above oftentimes combine to bring uncertainty to the pricing of gasoline. And more recently, legislation to incorporate more ethanol into transportation fuels has added 4 to 12 percent to the cost of regular gas.

Clearly the primary cause of fluctuation in gasoline prices involves the source of oil supply, be it the Middle East, Canada, Mexico, or the U.S.:

• The Organization of the Petroleum Exporting Countries (OPEC) is the single largest entity that impacts the world’s oil suppliers, representing 13 nations and over 40 percent of the world’s oil production and much of its oil reserves. By merely reducing production, it can cause gasoline prices to jump. As other countries, most notably the U.S., Mexico, Canada, Russia and China produce oil, OPEC tracks this production and adjusts its own production to maintain its targeted pricing.
• Despite the large amount of oil imported by the U.S., it is the third largest producer of crude oil, with the Gulf of Mexico being the largest region, including the Permian Basin located in west central Texas and eastern New Mexico and off shore drilling areas in portions of the Gulf. Other areas of the U.S. for producing oil include Alaska, Louisiana, California, Oklahoma and Arizona. That said, the U.S. is still heavily dependent on foreign sources, not only because of its extraordinarily high consumption rates but because of the need to hold back and send oil to the federally funded Strategic Petroleum Reserve (SPR). This reserve stores a 60-day supply of oil, one billion barrels as a hedge against the cutting off of all oil imports.
• As an adjunct to any discussion on domestic U.S. supply of oil, the issues around the Arctic National Wildlife Refuge (ANWR) come into play. Established in 1960 to protect the unique wildlife, wilderness and recreational values of the area, the northern portion of this region offers a key strategic leverage point in overall world oil production pricing. By merely threatening to explore the feasibility of drilling for an estimated 7 billion barrels of oil in the northern portion alone, other nations are incentivize to keep the oil production prices within some range of reasonableness.

Price Breakdown of Gasoline

Gasoline, like any consumer product, has a supply chain and several entities to which monies are distributed. According to the U.S. Department of Energy, dollars spent on gasoline are allocated to a minimum of four areas:

• Taxes – 15 percent. Both Federal and state governments place excise taxes on gasoline, and depending on the state additional sales taxes, gross receipt taxes, oil inspection fees, and various environmental fees.
• Distribution and Marketing – 11 percent. These costs include transporting crude oil to the refineries, and then to distribution points for ultimate transportation to gas stations, as well as costs to market the brand of a particular oil company. There are also markups provided to the gas stations themselves, though usually a very small percentage.
• Refining – 7 percent with the cost of refining diesel fuel being higher than that of regular gasoline.
• Crude Oil Suppliers – 67 percent: This is determined by oil exporting nations where the amount of crude oil produced determines the price of a barrel of oil. Rather dynamic, the price of oil has ranged between $35 and $150 a barrel over the past 6 years. This dramatic and continuous fluctuation in price was caused by investments in oil futures as well as increased demand from larger developing countries like India and China.

On any given day, the price of gasoline will vary from state to state:

• Taxes account for the majority of this price fluctuation,
• Competition among local gas stations also can impact prices, and
• Distances between the supplying refineries and the gas station can have an effect.
• Environmental standards regarding reducing the amount of smog created by burning gasoline vary across the U.S., recognizing that producing cleaner burning gasoline adds cost to its refinement, distribution and storage.

Impacts of Gasoline Prices

The price of gasoline has had and will continue to have a major impact on our economy:

• Individual consumers are frequently reminded of escalated prices as they fill their gas tanks on a daily or weekly basis.
• Travel plans revolve around the cost of gas as do decisions regarding the make and model of automobile to purchase. And, for that matter, fuel costs reflect in airfares and other modes of public transportation.
• To the extent that an increase in gasoline prices is steady, it will lead to inflation, though its pricing swings due to weather, labor strikes, military conflicts, etc. keep it from being a reliable leading indicator of inflation.