The Price Of Gasoline

The Price of Gasoline

June 1, 2005

The Price of Gasoline

What you are paying for when you buy a gallon of gasoline? Most people complain about the high cost of gasoline, but few understand how the price is calculated. Many people think this cost is for gasoline only, but many other factors determine what you pay at the pumps.

Gasoline is a mixture of the lighter liquid hydrocarbons, and used chiefly as a fuel for internal-combustion engines "Microsoft Encarta," 2005). Crude oil accounts for nearly 17 percent of the energy consumed in the United States. Gasoline is one of the main products developed from crude oil in the United States. The primary use for gasoline is in automobiles and light trucks. Fuel produced all year round, and is delivered from oil refineries through pipelines to a massive distribution chain serving 167,000 retail stations throughout the United States ("EIA Brochures", 2004).

The prices paid by consumers at the pump reflect the cost to produce and deliver gasoline to consumers. Included is the cost of crude oil to refiners, refinery- processing costs, marketing and distribution costs, and finally the retail station costs and taxes. Approximately 27 percent of the cost of a gallon of gasoline is federal, state, and local taxes. Another 14 percent is a combination of distribution, marketing, and retail dealer costs and profits. Refining costs and profits account for about 15 percent of the retail price of gasoline. This part varies from region to region due to the different formulations required in different parts of the country ("EIA Brochures", 2004) .

The average retail price for gasoline tends to be higher in certain States or regions than in others. According to the Energy Information Administration (EIA), other factors contribute to regional and local differences in gasoline prices aside from taxes. Special gasolines are required in some areas of the country. Environmental programs, aimed at reducing carbon monoxide, smog, and air toxins, require oxygenated reformulated, and low-volatility (evaporates more slowly) gasoline, which comes at a much higher price ("EIA Brochures", 2004).

The proximity of refineries to crude oil supplies can be a factor, as well as shipping costs from the refinery to market. In addition, the areas farthest from the Gulf Coast are the source of nearly half of the gasoline produced in the United States, and thus, a major supplier to the rest of the country. However, these cures tend to have higher fuel prices do to transportation costs ("EIA Brochures", 2004).

Competition in the local market is another reason why gasoline prices can be different. Consumers in isolated areas may have to choose between higher local prices and the inconvenience of driving some distance to a lower-priced choice. In addition, competitive differences can be significant between regions with only one, or a few gasoline suppliers versus regions with a large number of competitors in close proximity ("EIA Brochures", 2004).

Supply disruptions, such as scheduled or unscheduled refinery maintenance, can slow or stops production of gasoline for a short time, which can prompt a bidding war for available supplies. Prices will remain high if the transportation system cannot support the flow of surplus from one region to another ("EIA Brochures", 2004).

California consumes substantial amounts of gasoline - about 16 billion gallons per year. Crude oil, the primary component of gasoline, comes from within-state oil wells (42%), Alaska (22%), and foreign sources (36%). Nearly 90% of our gasoline is refined in state, but additional

quantities of gasoline and blending components are imported because refineries cannot keep with the growing demand. California is also isolated from other refining centers in the U.S. because the federal government as an air quality "non-attainment" area designates most of California. The gasoline in non-attainment areas must meet stringent air quality requirements to burn cleanly in order to protect public health and the environment ("California Energy Commission", 2005). In addition to the higher cost of cleaner fuel, California also has a combined state and local fuel sales and use tax of 7.25% o top of an 18.4% per gallon federal excise tax, and an 18% state excise tax. Refinery margins have also been higher due in large part to volatility in the region ("EIA Brochures", 2004).

In the United States, gasoline prices rose