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What determines gasoline prices?

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In the United States, the cost of gas has been a hot topic of conversation lately, as prices reach record highs.

The national average now sits at $5.00 per gallon, and by the end of the summer, that figure could reach $6 per gallonaccording to JPMorgan estimates.

But before we can understand what’s going on at the pump, it’s important to know what key factors influence gasoline prices.

This graph, using data from the US Energy Information Administration (EIA), outlines the main components that influence gasoline prices, providing the proportional impact of each factor on the price.

The four main factors

According to the EIA, there are four main factors that influence the price of gas:

  • Crude Oil Price (54%)
  • Refining charges (14%)
  • Taxes (16%)
  • Distribution and marketing costs (16%)

More than half of the cost of filling your tank is influenced by the price of crude oil. Meanwhile, the rest of the pump price is split roughly evenly between refining costs, marketing and distribution, and taxes.

Let’s look at each factor in more depth.

crude oil price

The most influential factor is the cost of crude oil, which is largely dictated by international supply and demand.

Despite being the world’s largest oil producer, the United States remains a net importer of crude oil, with the majority coming from Canada, Mexico and Saudi Arabia. Due to America’s dependence on imports, gas prices in the United States are largely influenced by the global crude oil market.

A number of geopolitical factors can influence the crude oil market, but one of the biggest influences is the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia.

Founded in 1960, OPEC was created to fight against American domination of the world oil market. OPEC sets production targets for its 13 member countries and, historically, oil prices have been tied to changes in OPEC production. Today, OPEC countries are responsible for around 60% of the oil traded internationally.

Refining costs

Oil must be refined into gasoline before it can be used by consumers, so refining costs are factored into the price of gasoline.

The United States has hundreds of refineries across the country. The country’s largest refinery, owned by Saudi-based Saudi Aramco, processes around 607,000 barrels of oil a day.

The exact cost of refining varies depending on a number of factors such as the type of crude oil used, the processing technology available at the refinery, and the gasoline requirements in certain regions of the country.

In general, refining capacity in the United States has not kept pace with oil demand. Several refineries have closed throughout the pandemic, but even before COVID-19, refining capacity in the United States lagged behind demand. Incredibly, no new refining facilities have been built in the country since 1977.

Taxes

In the United States, taxes also play a vital role in determining the price of gasoline.

Across America, the average gasoline tax is $0.57 per gallon, however, the exact amount fluctuates from state to state. Here’s a look at the top five states with the highest gasoline taxes:

Rank State Gasoline tax (per gallon)
1 California $0.87
2 Illinois $0.78
3 Pennsylvania $0.77
4 Hawaii $0.77
5 New Jersey $0.69

*Note: Figures include both state and federal taxes

States with high gas taxes typically spend the extra money on improving their local infrastructure or transportation. For example, Illinois doubled its gasoline taxes in 2019 as part of a $45 billion infrastructure plan.

California, the state with the highest gasoline tax, expects to see a rate increase in July, which will push gasoline prices up about three cents a gallon.

Distribution and marketing costs

Finally, distribution and marketing costs have an impact on the price of gas.

Gasoline is generally shipped from refineries to local terminals via pipelines. From there, the gasoline is further processed to ensure it meets market requirements or local government standards.

Service stations then distribute the final product to the consumer. The cost of running a gas station varies – some gas stations are owned and operated by brand name refiners like Chevron, while others are smaller scale operations owned by independent traders.

Big brands run a lot of ads. According to Morning Consult, Chevron, BP PLC, Exxon Mobil Corp. and Royal Dutch Shell PLC aired TV commercials in the United States more than 44,495 times between June 1, 2020 and August 31, 2021.

What is the impact of the Russian-Ukrainian conflict on gas prices in the United States?

If only a fraction of American oil comes from Russia, why is the Russian-Ukrainian conflict impacting prices in the United States?

Because oil is bought and sold on a global commodity market. So when countries imposed sanctions on Russian oil, it put pressure on global supply, which ultimately drove prices up.

This supply shock could keep prices high for some time unless the US falls into recession, which is a growing possibility based on recent data developments.