Gasoline prices are unavoidable for those of us who enjoy using our cars, boats or lawnmowers. But the way these prices are determined is not clear to many of us. Sometimes high gasoline prices are blamed on the Middle East or Wall Street. But the truth is, gasoline is priced much like everything else is — by the cost of producing and distributing it.
Here are six seldom talked-about factors that contribute to the price we end up paying at the pump.
- The price of crude oil
Just like the price of ketchup is going to depend on the price of tomatoes, the price of gasoline depends largely on the price of crude oil. In fact, the initial price of oil is the single most important factor, and can contribute up to 72 percent of that final price tag.
- Global demand for oil
If you paid any attention in your economics class, you know that price increases with demand from consumers. Because oil is consumed across the globe, demand in far-off countries can still impact the prices we pay here in the United States. When the demand is high, the price is high as well. But these higher prices can also make it worth it for producers to spend more on research, development and extraction of harder-to-reach oil.
- The cost of refining
Once we have the crude oil out of the ground, we have to refine it into gasoline. This process accounts for about 12 percent of the final price at the pump.
- The cost of blending
The gasoline you find in Oklahoma is not the same as the gasoline found elsewhere in the country — and it’s not priced the same, either. Depending on where you live, the gas you buy at the pump could be blended with different types of gasoline to meet clean air requirements. This blending process adds to the final cost.
- The cost of distribution and marketing
Logistics also have to be considered throughout this process. Once we have the crude oil, it must be transported to the refinery. Once it’s turned into gasoline, it must be transported to the retailers by pipelines or tanker trucks, so it can go into your car. The cost of building and maintaining pipelines and transporting oil and gasoline is passed onto us at the pump.
- Taxes
Just like death, taxes can’t be avoided — even on something as necessary as gasoline. Federal, state and, depending on where you live, sales tax usually contributes around 11 percent of the total price at the pump.
So there you have it — no more mystery to gasoline prices. Now, when you fill up, you’ll know what you’re paying for and why.