Menlo Park, CA, April 2011
WHY GAS PRICES CHANGE
The price of gasoline fluctuates with several markets, not only the retail market of service stations. In fact, when looking at the national average gasoline at the pump, the international crude oil market is the single biggest factor determining the price.
THE INTERNATIONAL OIL MARKET IS VOLATILE
International crude oil prices can change according to what OPEC, the Organization of the Petroleum Exporting Countries, decides to do, because they own most of the world’s proven oil reserves and produced about 40 percent of the world’s oil supply in 2010. OPEC is the largest entity involved in crude oil production, and it holds prices at a particular level by slowing production and withholding supply.
In general, when economic growth slows globally, demand for crude slows and the price of oil drops, which is reflected back at the pump.
Oil prices can also fluctuate because of oil traders, those who buy and sell crude oil before it’s refined into fuels and other products. Traders are very sensitive to political instabilities – well before there are actual restrictions on oil supply – such as occurred during the Egyptian revolution of 2011, when oil prices increased as oil traders worried about crude traveling through the Suez Canal, even though only 2 percent of the world supply ships through that waterway, which is controlled by Egypt.
The events and conditions that convince oil traders to buy and sell are sophisticated and carefully tracked by authorities here and internationally because oil is so critical to the global economy. However, even though many monitor oil prices carefully, the market can be manipulated. For example, in May 2011, the United States government alleged that Australian and American oil traders fraudulently restricted supply to hike up crude prices. U.S. Suit Sees Manipulation of Oil Trades.
Note: the Transportation and Marketing costs in the above chart were calculated by the Energy Information Administration as the remaining difference between the average retail cost and the other three components.
WHY PRICES ALSO VARY STATE-TO-STATE AND CITY-TO-CITY
Regionally, the price of gasoline can change because of local competition, rents, local laws, and temporary shortages, particularly if there’s a limited amount of refined oil. Some states are just plain closer to the refineries, and some states have emissions-related requirements for gas that limit the source of gas to certain refineries.
Californians pay some of the highest gas prices, not because their state tax rates, but because of stringent requirements on the blend of gasoline allowed to be sold. That means there are few refineries outside of California that can supply gas to the state. The elevated price is both due to limited supply from refineries and a higher refining cost.
In other states, the distance to refineries can add cost too. Hawaii is far away from almost everywhere, and it probably comes as no surprise that gasoline prices in that island state are high. Average prices by state are compiled here.
Geography and laws about what can go in the gas sold in a state contribute a lot to the price of a gallon of gasoline, perhaps significantly more than the factor that’s often blamed for wide-ranging prices, taxes.
Compared to Europe, Americans pay far lower taxes on gasoline, in the range of 15 percent (see chart above) as compared to more than 50 percent for some countries. For a chart of how much tax various countries pay, go here.
The federal government applies a per gallon tax on gasoline and diesel in every state.Then, individual states and even counties add their own taxes, which can be both sales and fuel taxes. For historical and current gasoline taxes by state, you can visit the Federal Highway Administration website here. Fuel taxes are applied by the gallon. Sales tax is applied to the overall cost of the gas, by percent.
The most expensive states to buy regular gasoline in 2009 were, on average, Alaska, Hawaii, and California. The cheapest states were Kansas, Arkansas, and Tennessee, even though Arkansas, Kansas, and Tennessee all charge higher per gallon fuel taxes than California.
Californians also paid the same rate of sales tax, 6 percent, as many other states in 2010, like Michigan, Maine, Tennessee, and Minnesota. However, since their base price of gas is higher, the percent sales tax was higher too.
For recent gas prices by region, go here.
Other costs that affect the price of gas include distribution (shipping and trucking crude oil to refineries and then to consumers) and refining (turning crude oil into gasoline, a mixture of carbon-based liquids). For more information about our dependence on crude oil, see here.