May 24, 2001
DETERMINATION OF GASOLINE PRICES
By: Paul Frisman, Research Analyst
You asked how gas prices are determined. Specifically, you asked what factors contribute to the final price that consumers pay at the pump.
According to the U.S. Energy Information Administration (EIA), the factors that contribute to the price of gasoline are the costs of (1) crude oil, (2) refinery processing; (3) marketing, distribution, and profits, and (4) taxes.
FACTORS CONTRIBUTING TO THE COST OF GASOLINE
The cost to produce and deliver gasoline to consumers includes the costs of the crude oil, refining the oil into gasoline, marketing and distributing the gasoline to gas station pumps, and federal and state taxes. While the four components remain the same, the percentage of the total cost they represent varies from year to year, depending on a number of factors.
For example, in 2000 the relative proportion of these costs in a gallon of gasoline was: crude oil, 46%; refining costs and profits, 14%; distribution, marketing and profits, 12%, and taxes,
28%. But in 1999, the proportion for the same gallon of gasoline was: crude oil, 37%; refining costs, 13%, distribution, marketing costs, and profits, 14%; and taxes, 36%.
FACTORS AFFECTING EACH OF THE FOUR COMPONENTS
Crude oil prices are determined by worldwide supply and demand, and are heavily influenced by decisions of the Organization of Petroleum Exporting Countries (OPEC). OPEC has enormous influence over the price of crude oil because its members account for nearly 40% of the world's production of crude oil and 67% of the world's crude oil reserves.
OPEC tries to keep world oil prices at a target level by setting limits on production. In 1999, for example, OPEC cut oil production, and EIA reports that OPEC again cut production this January in anticipation of an excess supply this spring. In addition, rapid price increases in the cost of crude oil have occurred as the result of such crises as the Persian Gulf War and the Iran-Iraq war. Also, increased demand from Asia and the U.S. have contributed to higher prices. The increased U.S. demand has been attributed, in part, to increased reliance on sport utility vehicles, vans and trucks.
This component can vary by region depending on the particular formulation of gasoline required in different parts of the country. Newspaper reports (attached) indicate that recent increases in refining costs were attributable to (1) refiners' delay in switching from the production of home heating oil to gasoline this spring; (2) the fact that refineries are operating at or near capacity; (3) the fact that no new refinery has been built in the U.S. since the mid-1970s; and (4) unexpected crises, such as a fire that occurred in April at a Los Angeles refinery.
Distribution and Marketing
Gasoline inventories, proximity to supply and local competition affect costs at the pump, as does ownership of the particular service station. About one-third of gasoline stations today are owned or leased by a major oil company. The prices at these stations may be subject to "zone pricing," where oil companies charge dealers in different geographic areas a different price for the same grade of gasoline, depending on location and demand.
EIA reports that federal excise taxes account for 18.4 cents of the cost of each gallon, while state taxes average an additional 19.96 cents per gallon. (Connecticut's motor fuels tax is 25 cents a gallon). Also, EIA says that seven states impose additional sales taxes on gasoline. Local county and city taxes also may affect gasoline prices.
More information can be found on the EIA web site at http://www.eia.doe.gov and on the web site of the American Petroleum Institute at http://www.api.org/.