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Oil Prices: The Raw Reality

Refining Comes at a Price

Crude oil prices play a significant role in determining gasoline prices. According to the U.S. Energy Information Administration, the price of crude oil accounted for 56% of gasoline prices from 2010 to 2020, on average. However, this average conceals wide fluctuations. In 2020, as crude oil prices dropped sharply due to the COVID-19 pandemic, the cost of crude accounted for 43% of the cost of gasoline. But in 2022, with Russia’s invasion of Ukraine, oil and gas prices rose again.

Distribution and Marketing

Once crude oil is refined into gasoline, the fuel must be transported to storage tanks and distributed to local gas stations. These stations require staff and maintenance. Distribution and marketing costs accounted for 14% of gasoline prices in the United States from 2010 to 2020, on average.

Tax Inclusions

State and local taxes made up 16% of gasoline prices from 2010 to 2020. Additionally, federal taxes and fees were 18.4 cents per gallon for gasoline and 24.40 cents per gallon for diesel as of July 1, 2021. State taxes averaged 30.63 cents per gallon for gasoline and 32.29 cents per gallon for diesel on the same date.

Consumer Demand

Consumer demand also plays a significant role, as the high demand since the beginning of the COVID-19 pandemic has been a primary reason for the rise in retail gasoline prices from an average of $2.17 per gallon in 2020. Gasoline consumption in the U.S. sharply declined in 2020 due to COVID-19 restrictions but rose significantly in 2021. Gasoline prices can fluctuate widely to balance supply and demand, as consumers in the U.S. tend to adjust their driving habits in response to changes in gasoline prices.

Conclusion

Like crude oil, gasoline is a widely traded commodity with prices determined by competitive markets. Major gasoline distributors can exert significant market power at the local level and have recently come under official scrutiny. Generally, blaming a specific politician or industry for rising gasoline prices warrants skeptical examination. The president or state governors can do little, except when it comes to fuel taxes (which, in the U.S., are much lower than in other parts of the world).

Source: https://www.investopedia.com/articles/economics/08/gas-prices.asp


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