Understanding Gas Pricing and Cost Factors

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Understanding gas pricing and the associated cost factors is very complicated. There are determinants involved at all levels, including locally. Gas cost is part of a volatile, interdependent, supply and demand situation. It is possible, however, for consumers to understand what contributes to the price fluctuations commonly witnessed at the pumps.

Crude Oil

The biggest portion of gas cost is always the crude, the raw material drilled from the earth and used to make gasoline. About 65 to nearly 70 percent of each dollar you spend on gas goes to crude suppliers. This is largely determined by oil-exporting nations, particularly OPEC, that determine how much oil to produce and sell to other countries. The more oil produced, the lower the cost of gas.

Crude is produced and sold in barrels (1=42 gallons). One barrel cost around $35 in 2004; in 2011 that figure hovered around $120. Cost factors include a few things: less production of crude; less availability in high-quality crude that gasoline is made from; disruptions of oil production in producing countries; and the decline of the U.S. dollar, the currency of all oil trade in the world market.

Further, there is a great demand on oil from developing nations, like India and China whose automotive markets are beginning to boom and where thousands of miles of roadway is being constructed. Americans too show no signs of decreased demand. With 86,000 miles of highway the pain at the pump will only linger.

Take the Oil Quiz!

Crude Oil Refining

Crude is transported to refineries where gasoline and other petroleum products are made. Refinery costs account for close to 15 percent of pricing. Gasoline requires a higher quality of crude, referred to as light/sweet crude. It has fewer impurities and is cheaper to produce. Lower quality crude, or heavy/sour crude, has a higher sulfur content that is costlier to produce and is tough on equipment. Obviously, there is more demand for sweet crude, but it is becoming less available. Thus, gas prices may increase.

The seasons make a difference, too. There is about a five percent increase in gas prices during the summer (and holidays) in expectation of more travel. Refineries alter their formulas to protect air quality. Also, winter blend-gasoline is less expensive than gasoline used in the summer.

There is need for more refineries in the U.S., which hasn’t built one since the 1970s. Domestic refining of oil helps to offset sudden demands at home; but without this ability, more oil has to be imported.

Source

The 12 OPEC Nations

Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Libya, Algeria, Iran, Iraq, Nigeria, Angola, Venezuela, Ecuador

Gasoline Tax, Distribution, and Marketing

About 13 cents of every dollar goes to gas taxes—federal, state, local, and special. This could mean as much or more than 30 cents on every gallon of oil produced—and American taxes are far cheaper than in Europe. Taxes and inflation in the U.S. have dramatically increased since the 1950s. (Taxes are sometimes a larger percentage on the dollar than refining costs!) Taxes are the primary reason for differing prices around the country.

Distribution and marketing are cost factors directly passed on to you. Crude is extracted and transported to refineries, then to wholesalers and retail locations. These costs are not included in the cost to produce gasoline and neither are the costs for marketing the company brand. These costs account for about eight percent of your dollar.

Source

Believe It or Not...

Gas costs 18 cents in Venezuela!

See How Crude is Extracted

More Pain at the Pump

Other cost factors contributing to fluctuations in gas pricing are:

Air Quality Monitoring

States and regions have different air quality requirements. This places pressure on refineries to produce various formulations, called boutique fuels. Consequently, it slows the process and pricing increases.

Proximity

Most gasoline in the U.S. is produced on the Gulf Coast. People who live farther from this region will pay more due to transport costs.

Competition and Markup

Competition drives down costs, so gas prices automatically increase where there is little competition, like in rural areas. Many gas stations are owned by independent businesses and have the freedom to set their own prices. This means that stations are free to add on to pricing.

Then, while some states are enacting gouging laws, others have laws prohibiting stations from charging less than a certain percentage over the invoice price. This protects small gas stations from being driven out of business by large chains. The truth, however, is that large companies are increasingly having less to do with gasoline retail.

The Unpredictable

Military conflict, world events, and disastrous weather do take their toll. Again, anything that affects oil from the time it is drilled and anywhere in the process translates into a potential price hike. And let’s not forget to include speculation and how oil investors are thinking about it all. Gas pricing and its cost factors is complicated, but you should understand a little better now.

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Comments 12 comments

ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

Insightful. Thanks for reading, Rock_nj.


Rock_nj profile image

Rock_nj 4 years ago from New Jersey

Well written Hub about the subject of what makes a gallon (or liter) of gasoline cost what it costs. I look forward to the day when developed economies are not so reliant on gasoline for transportation, because every major recession since the early 1970s is directly linked to a major oil/gas price spike.


ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

I'm sure that we in America cannot imagine normal prices being as high as in some places around the world. It is annoying, as you say. Thanks for reading!


IntroduceCroatia profile image

IntroduceCroatia 4 years ago from Croatia

I'm from Croatia, and gas prices here are enormous. Everyday the news say today the price of gas is increased by...and it's really annoying.

Voted up and useful!


ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

But "how it is manipulated" is political, right? That's what I've chosen to avoid, and I honestly encourage you to write a follow-up about the rest. I know you'd do an excellent job. But what I've written does answer the question about contributing factors to price fluctuations. When someone asks the question "Why is gas so expensive?" I don't think they're looking for extensive, geopolitical insight. You're gonna lose them, although it matters greatly. What I've written, I suppose, would be Petroleum 101. There's more to explore in what I've written, agreed? But now we're ready for 201--please indulge us!


ib radmasters profile image

ib radmasters 4 years ago from Southern California

ithabise

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The hub is written to answer the basic question, "Why is gas so expensive?"

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Then you have to include those factors that I mentioned into the answers otherwise you don't have the real answer. These are not political aspects of gas pricing, they are the reality of the market and how it is manipulated.


ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

The hub is written to answer the basic question, "Why is gas so expensive?"


ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

Thanks MsDora. I'm glad you learned something. My point was a general, bare-boned understanding of the factors involved. I am aware of the things IB stated, but I see those as more political elements that, as you say, can be further explained in a follow-up hub. Cheers!


MsDora profile image

MsDora 4 years ago from The Caribbean

Ithabise, thanks for the information. Yes, I did learn a little about air quality monitoring and also the 12 OPEC nations. . Perhaps Ib can write another hub outlining some other factors. There is always something more to learn.


ib radmasters profile image

ib radmasters 4 years ago from Southern California

No, I mean there is more than those factors that are in play.

Oil is a de facto Super Global Monopoly that can manipulate Supply to create demand. They did it in the 1970s, and now in recent times they also can increase the price just by manipulating speculation.

The difference between the 70s and now is the investing by computer. These computers make buys and sells that are in large numbers that affect the price simply because of the sway it has on the market.

In the US, there is a shortage of refineries, especially in CA where they use a special blend. So when the recent Richmond Chevron refinery fire stopped their production, the cost at the pumps immediately goes up. The same is true from Isaac last week.

My point is that while your factors contribute to the cost and pricing of oil and gas, there is an overriding control by OPEC that can manipulate the price without any events. And even though not all countries are part of OPEC, they all use their pricing.

Whenever a Monopoly has the product, they can charge whatever the market will bear.


ithabise profile image

ithabise 4 years ago from Winston-Salem, NC Author

If you're meaning anything political, there is no point. The purpose is to explain contributing factors to price increase and decrease.


ib radmasters profile image

ib radmasters 4 years ago from Southern California

So what is your point on the oil and gas pricing?

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