No single factor drives the world economy like the price of oil and gasoline. Because oil is also involved in the transportation of goods, people and services, the fluctuations of the market trickle down to nearly every business sector, whether it’s food production, mining, or even travel and leisure. The majority of us “feel the pinch” the most at the pump, and during an election year, much debate swirls around gasoline prices. But what factors make up the price you pay at the pump?
5. Crude Oil Prices
This is the simplest component in gas prices: the price of a barrel of crude oil — the raw stuff, straight from the ground — on the world market accounts for about 66% of the price of a gallon of gasoline. One barrel of oil equals about 42 gallons of oil. This means that if oil is trading at $100 U.S. dollars per barrel, $2.38 a gallon is the equivalent price of the commodity on the world market. Currently, oil is trading around $85 per barrel, but it spent much of early 2012 trading over $100 per barrel. That’s still far short of the record $145 a barrel in 2008. Much of this crude oil pricing is driven by speculation and confidence in the worldwide economy, as well as global instability. Oil cartels wield enormous influence and have been known to embargo the world market, as the OPEC nations did in the 1970s. As the price of oil goes up, it’s also becoming more economically feasible to go after previously unexploited sources, such as the tar sands in Canada and deep-water drilling in the Gulf of Mexico.
4. Oil Refining
The process of turning crude oil into gasoline for use in internal-combustion engines accounts for about 15% of the total price of a gallon of gas, according to the U.S. Energy Information Administration. It’s interesting to note that refineries often operate at a very narrow margin when it comes to oil production and often feel the fluctuations on the market even more than consumers. Of course, oil refineries also produce much more than just gasoline for cars. Crude oil also becomes kerosene, diesel fuel, and home heating oil, in addition to plastics and petroleum products. Detergents, anti-knock mixtures (the octane rating we see at the pump) ethanol, and more all have to be added to gasoline before it’s pumped into your car. Fewer refineries in operation can drive up speculation and the price of gas, as happened in 2005 when Hurricane Katarina closed several Gulf refineries and the price of gasoline spiked upward.
3. Distribution and Marketing
Ironically, it takes gas to get gas. And nowhere is this more apparent than the process of getting the gas to the point of consumption. This can account for about 8% of the final price; you’ll notice, for example, that isolated areas in the United States pay a higher cost than coastal ports. In some parts of the world where oil and gasoline are produced, taxes are non-existent and a government monopoly exists in the oil industry, prices are very low; Venezuelan motorists, for example, pay less than 10 cents a gallon. Europeans typically pay about double U.S. prices, with Italy, Greece, the Netherlands and the three Scandinavian countries all paying more than $9 per gallon.
Taxation and tariffs on gasoline typically account for 11% of the final price of gas. Of all of the factors in gas prices, this is the one that politics can influence most. According to the American Petroleum Institute, as of April 2012, combined federal, state and local taxes were as low as 26.4 cents a gallon for residents in Alaska to a high of 69.6 cents in taxes per gallon in New York. Of this, federal taxes account for 18.4 cents a gallon. Most of the taxes on gasoline go back into road and state highway funds for maintenance, needed to get goods, services, and, yes, fuel to their destination. Raising taxes is never popular with voters, and federal taxes on gasoline have not been raised since 1993, and therefore haven’t kept pace with inflation. States and local governments must either raise taxes to compensate to keep roads maintained, or learn to do with less.
1. Supply and Demand
The final factor that drives the price of gasoline (or any commodity for that matter) is also the simplest but often the most enigmatic. If there’s a flood of a product on the market, the price will go down. Having a scarcity makes it more valuable, and the price goes up. You see this action daily at any busy intersection; any two competing gas stations want to make a maximum profit. But if a station owner sets his prices too high, he’ll lose customers to the guy across the street. What holds true locally also occurs globally, and speculation on the future supply versus demand conditions for fuel propels the market prices. In 2011, the U.S. consumed 134 billion gallons of gasoline, down about 6% from a high of 142 billion gallons in 2007. The economic downturn and the transition to green energy are often cited for this trend, but fossil fuels will remain an immovable part of our infrastructure for some years to come. Electric motors may work for single-car commuters, but won’t propel aircraft, trains, and tractor-trailers.
Many economists cite the end of cheap oil in the coming decades. Though this fear has come and gone several times in the past few decades, it’s interesting to note that national and world production projections made in the 1990s closely mirror the actual production statistics seen in recent years. Countries and conglomerates are also careful to not flood the market, a reason that reserves may lay untapped or unexploited until it’s profitable to do so. The same happens in agriculture on occasion, when the government pays farmers to not grow crops in an effort to stabilize prices. This also leads to accusations that some politicians use the supply and demand of oil for political ends. Like anything on the world stage, however, even the simple price of a gallon of gasoline has a complex story to tell.