Every evening, the nightly news reports on the rise and fall of the oil prices and anyone who takes the time to look at the market sees how prices can fluctuate dramatically from hour to hour and minute to minute. Yet, driving out to the closest gas station, prices seem to change entirely on their own schedule, sometimes jumping up sharply on a day when crude oil sat still, or drifting down even as crude prices spiral upward.
What goes into gas prices?
Crude oil prices tend to follow the market as a whole, reacting constantly to economic reports, analyst estimates, government announcements and a whole host of other events that can impact the economy.
Gasoline on the other hand, has a few very specific factors that determine its price and how it varies.
Prime among these is the price of crude oil itself, which factors in all the same economic news, but at a level removed. Since the crude market is following futures contracts, which promise delivery at a specified date in the future, there is a great deal of uncertainty about supply and demand, making it very reactive to any market news. Gasoline prices tend to be set in response to current conditions, which are easier to estimate and change more slowly.
Meanwhile, the U.S. Energy Information Administration notes that crude oil accounts for only around two-thirds of what consumers are ultimately paying for at the pump. The remainder can be attributed to the cost of refining (13 percent), the cost of distribution, marketing and retail (10 percent) and taxes (11 percent).
Each of these costs is significantly more stable than the countless factors that constantly push crude oil prices up and down. Taxes impose a fixed charge on gasoline, proportional to its price, so this charge rises and falls exactly as the combination of other factors. Meanwhile, refining, distribution, marketing and retail all have as much to do with generally fixed costs such as real estate and wages, which generally do not change in the short term.
In addition, though gasoline prices are ultimately impacted by changes in oil demand across industries, actual demand for gasoline responds in a more predictable fashion than the crude oil futures that rely on projections.
Aside from the fact that oil and gasoline generally do not change in tandem, many also wonder why gas prices vary so dramatically from region to region. Many imagine regional prices should be a simple matter of how much oil is available nearby, but the EIA notes that it is highly unlikely that any gasoline comes from only a single shipment of crude oil, much less only from local production.
Beyond that, with nearly one-quarter of the cost of the gasoline tied up in the refining and distribution, there can be huge variations based upon a region's refining capacity or how far it sits from the closest plants. In regions like Alaska, which produce significant amounts of oil but have little refining, the cost of transportation alone can prove to be a much larger fraction of the final price.
Many states also impose different rules on the quality of gasoline vehicles can use. California requires a very specific blend that looks at the overall carbon footprint of the gasoline, while many states require varying levels of ethanol. The specificity of the blend required by state law can serve to drive up prices by limiting supplies.
Finally, the EIA notes that U.S. refiners have begun to export more gasoline as demand has fallen at home. While this might not lead immediately to higher prices, the global market could play a role eventually if strong demand abroad offers better prices than at home.