The price increase is on the minds of many. Price spikes increased expenses for housing, food, clothing, etc. Fuel prices, and in particular gasoline for cars, are at the heart of many of these increases. However, many factors have contributed to the need to increase fuel expenditures.
Gasoline prices were on the rise at the start of the year. On June 14, 2022, the average cost of a gallon of gasoline eclipsed $5 for the first time in history. Prices have fallen nearly a dollar since then, with some projections guaranteeing further declines and others anticipating a rise in the coming months. It’s easy to point to a long list of possible causes: unrest in Europe, the lingering effects of the COVID-19 outbreak, or the tightening of the global supply chain in response to shortages. Others swear that inflation is the only culprit, and some skeptics are convinced that corporate greed within the industry is the real cause.
Despite all these uncertainties, one thing is clear: Fuel prices impact more than just the price consumers pay at the pump. Rise in oil prices lead to corresponding increases in various industries and may affect Uber prices, airfare costs and shipping times. Rising fuel prices have also threatened longstanding industry practices, such as the just-in-time (JIT) inventory management model, and may effectively tighten global oil supply. Since fluctuations in fuel prices can affect many other industries, it is important to identify the discrete factors that affect the price of gasoline.
First, the price of crude oil represents approximately 54% of the retail price of a gallon of gasoline. Since oil futures trade in a global commodity market, the fundamental economics of supply and demand determine the price of crude oil. Additionally, geopolitical instability can also impact the price of crude oil. Although it produces the most oil of any country each year, the United States is a net importer of oil. This makes the country particularly susceptible to supply chain disruptions or international sanctions on petroleum products resulting from foreign conflicts, such as the conflict between Russia and Ukraine.
The next factor, made up of federal, state, and local taxes, accounts for about 16% of the retail price of a gallon of fuel. Currently, the federal government charges an excise tax of 18.30 cents per gallon as well as a 0.1 cent federal storage charge. State taxes vary by jurisdiction, averaging about 31 cents per gallon at the start of 2022. Some state-imposed taxes vary significantly from others. Consumers looking to buy a gallon of gasoline in California can pay up to $6 a gallon with a state tax of 57 cents, for example, while Alaska only imposes a state gasoline tax of about 9 cents. Some municipalities may also impose taxes on retail gasoline sales, which further increases these price disparities.
Crude Oil Refining Costs represents approximately 14% of the price paid at the pump. Refining costs can depend on a variety of factors, including the type of crude oil used, the processing technology available at the refinery, and the specific fuel requirements imposed by given local and state governments. Refining costs are also seasonal, with the summer months generally bringing higher costs. Unfortunately, United States Oil Refining Capacity has been lagging behind demand for years. This problem started long before the onset of the COVID-19 pandemic, but supply chain issues and reduced labor availability resulting from the pandemic have all exacerbated the capacity problem. However, there has been very few new refineries opened in the United States since 1977. With many refineries closing or switching to producing alternative fuel sources such as biofuels, refining capacity may continue to lag oil demand in years to come. . This drives up the price of gasoline.
Finally, the distribution and advertising costs represent about 16% of the retail price of gasoline. After crude oil is refined into gasoline, it is shipped from refineries to local terminals via pipelines. Then the gasoline can be blended with other products, such as ethanol, to meet local regulations. Retail gasoline is ultimately distributed to individual service stations by tank truck. Each step in this distribution process adds additional costs that the consumer ultimately bears at the pump. On the advertising side, costs can vary depending on the marketing strategy chosen by the station owner. Station owners face a number of additional costs, including employee salaries, rental or lease payments, equipment costs, insurance, and more. These costs vary by station, season and location, but many of these costs are passed on to the consumer at the pump.
Given the variety of factors that affect retail gasoline prices, it can be difficult to identify the specific causes of rising or falling costs. Rather than focusing on the ever-changing retail price of gasoline, it’s wiser to consider other factors. The price of world crude is the primary driver of retail gasoline prices, so the price of West Texas Intermediate (WTI) crude, changes in U.S. production capacity and GDP, and consumption patterns world and national oil prices are the most informative. Businesses must consider location-related factors affecting fuel prices, including state and local taxes and other regulations that increase overall costs. Companies can also keep tabs on domestic refining capacity and global demand, as well as any news regarding foreign conflict or other sources of geopolitical instability. It is impossible to determine whether fuel prices are rising or falling with a high degree of precision, but understanding what factors make up the “price at the pump” can bring clarity to a dynamic situation and the uncertainty that rising costs brings.