Gas prices increase every summer, and oil companies report record profits equally as Americans are preparing for the summertime travel season. The two events – rising fuel prices and increasing travel by Americans – may seem more than coincidental. Facts are, gas prices are based on a combination of monetary and fiscal details: the price of crudeoil and taxes, refining costs, and distribution costs.
Source – Energy Information Administration (March 2011)
The Energy Information Administration describes these pricing components the following:
Taxes: the monthly national average of federal and state taxes applied to gasoline.
Distribution & Marketing Costs: the difference between your average list price of gasoline and the amount of the other 3 components. They are the costs charged by a local retail gasoline station and can include profits.
Refining Costs: the main difference between the monthly average of the price of gasoline and the average price of crude oil purchased by refiners. This too includes profits.
Crude Oil: the monthly average price of crude oil purchased by refiners. Oil price is the one biggest element in the price of gasoline.
United States refineries produce approximately 90 percent in the gasoline used in the United States, with about 45 percent of U.S.-produced gasoline coming from refineries along the U.S. Gulf Coast. Less than forty percent of the oil used by Usa refineries is produced in america.
Why gas prices rise
Gas prices rise (or fall) primarily due to changes in the global oil market. Prices are also affected by variations in tax rates among states, in addition to refinery issues, and retail gasoline dealer issues likerent and site, and local competition.
Global industry for crude oil
The buying price of crude oil will be the main reason for the general surge in retail gasoline prices since the start of 2009. Generally, a $10 increase in oil prices results in a 25-cent increase in retail gasoline prices. Crude oil prices depend on several factors including worldwide supply and demand, stability in the distribution network, the value of the U.S. dollar, and price speculation.
Supply of oil: The Organization of your Petroleum Exporting Countries (OPEC), a cartel of 12 oil-rich countries, which produces about 43 percent from the world’s oil, exerts significant influence on prices by setting production limits on its members.
If the overall supply of crude oil decreases, the world market tightens and cost usually rises. Restricting the supply pushes up pump prices by as much as 80 cents a gallon. OPEC countries have essentially each of the world’s spare oil production capacity and possess about two-thirds of the world’s estimated crude oil reserves.
Worldwide demand for oil: The United States consumes more oil and refined products (such gasoline, diesel and as heating oil, and jet fuel) than any other nation in the world.
The demand for crude oil in India, China and other developing countries, however, has risen with their populations, increased trade, growing internal markets, and strong commodity prices. Developing nations are expected to account for nearly half of the international demand by 2015, up from 36 percent in 1996. Increasing demand leads to higher prices.
Interruption of the distribution network: Interruptions in the flow of oil through the distribution network can cause gasoline prices to rise, including natural disasters like Hurricane Katrina, the Gulf Coast-BP oil spill, or political instability in countries like Iraq,Yemen and Libya, Saudi Arabia, Venezuela, or Nigeria.
Importance of the Usa dollar: Oil is traded on the world market in U.S. dollars. When the need for the dollar drops in comparison to other major currencies, producers earn less and compensate by raising the price per barrel of oil.
Commodities market speculation: Speculation in the commodities markets where crude oil is traded also drives up the cost. Financial speculators make money around the fluctuations in prices of commodities like oil by placing bets that the price will go down or up. Some studies show that the speculative interest in crude oil markets has doubled, from 18 percent to 36 percent from 2003 to 2009.
Speculative activity results in a cost premium estimated at about a fifth of the oil price or 20 cents of every dollar spent on gasoline. The U.S. Commodity Futures Trading Commission and the Usa Department of Justice regulate and investigate speculation and illegal market manipulation in the oil market.
Tax impact on price at the gas pump
, and native government taxes are the second largest part of retail gasoline prices.Federal and state Federal excise taxes are approximately 18 cents per gallon, and state excise taxes averaged 22 cents per gallon at the beginning of 2011. 12 states levy additional state sales and other taxes on gasoline, as of January 2011.
Oil refining requirements and costs
Refiners typically earn about 20 cents for every gallon they process. Refiners lose cash when plunging prices require them to sell gasoline for less than the oil they bought. Refining costs and profits vary due to different gasoline formulations required in different parts of the usa.
To comply with the Clean Air Act, refiners must switch to summer blend formulas for many urban markets on or around May 1 each year. Such blends are definitely more more and complex costly to make. Many contain ethanol, an alcohol mixed with gasoline to create a cleaner fuel that will account for as much as 15 percent of some gasoline blends.
The way your local service station profits from gas sales
Retail dealers earn approximately 14 cents on every gallon of gasoline sold. Dealer costs include wages and salariessalaries, benefits and equipment lease/rent, insurance, and also other overhead. An individual dealer’s cost of doing business varies depending on number and site of local competitors.
Stations next to one another may have different trafficrents and patterns, and sources of supply that affect their prices. Because stations pass along higher real estate costs, gasoline often costs more in wealthy neighborhoods. Credit card companies also earn 2.5 percent of your transaction cost as opposed to a flat fee, which impacts dealer margins.