Gas prices are rising daily. What is driving the increased cost of gas and fuel in general? Why does gas cost so much? Whats the biggest driver of gasoline prices?
This is multi-part series on the prices of fuel (gasoline, petrol, oil, diesel), why gas costs so much and what makes up the price of gasoline. In part 2, we'll look at gas prices around the world and why some countries pay so little and some pay so much.
Part 1 – What Affects the Price of Gas?
The US Department of Energy has a nice page that breaks down the price of gas and diesel. It shows where every part of each dollar spent on fuel goes.
Taxes
Of each dollar spent on gasoline about 12% or 12 cents goes to taxes. At $4 per gallon that's $.48 per gallon. Of course that's just an estimate, gas taxes vary by state.
In the US federal gas tax is around 18.4 cents ($.18) a gallon. However, state taxes vary widely. California has the highest fuel taxes. California adds an additional 45.5 cents ($.46) for a total of 63.9 cents ($.64) cents a gallon. Diesel fuel is even more expensive. Diesel taxes in California are $.72 per gallon. That includes the 24.4 cents for federal diesel taxes and the remainder is for the state.
The state with the cheapest fuel taxes is Alaska. Alaska taxes gas and diesel fuel at 8 cents per gallon.
If we assumes $4 / gallon gas in California, the us government gets $.184 of that and California gets $.45.5 for a total of $63.9. So taxes are about 16 percent of the price of gas in California. Since fuel taxes are fixed, as gas prices go up, taxes become less of a factor in the cost. In other words, with high gas prices, governments don't make any more many and you don't pay anymore taxes. That is unless your state charges sales tax on gas. In that case, you would pay more as prices went up.
Distribution and Marketing
Distribution and Marketing only get about 8% (8 cents) of each dollar spent on gasoline.
The government estimates this amount by subtracting the cost for crude oil, refining and taxes from the price of a gallon of gasoline. What's left over is the profit and cost that goes to the gas station and oil companies for shipping the oil to the end consumer and all those wonderful gas station advertisements on the radio.
Refining
Of each dollar spent on gasoline about 8% or 8 cents goes to refining.
Refining is the process of turning raw crude oil into usable products like gasoline, diesel, motor oil, etc. The last refinery built in the United States was in Garyville, Louisiana. It started production in 1976.
According to many sources, refineries are running close to 100% capacity. Do you remember what happened to oil prices after hurricane Katrina? Prices went up because some refineries were damaged by the storm. With limited refining capacity, we are at the mercy of the weather and mechanical problems and anything else that can shut down a refinery.
Crude Oil
The major component in the cost of gasoline is the primary ingredient: crude oil. According to the ">Department of Energy, crude oil accounts for 72% of the cost of gasoline at the pump.
Right now crude oil prices are at record highs. According to the history of oil prices from the Department of Energy, Oil is over $100 / barrel in May 2008. As recently as 2005 a barrel of oil was as low as $33.79.
Gas is Expensive Because Crude Oil is Expensive
I'm going to go out on a limb here and say that gas is expensive because crude oil, it's main component is expensive. You don't need a PhD in economics to figure that one out. 72% of the cost of gasoline is based on the price of crude oil. The price of crude oil has tripled in the last 3 years. I'll let you do the math.
Read Part 2
In part 2, I'll discuss gas prices in the United States relative to the rest of the world. Here is the link to Part 2 of the Gas Price Series.
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Comments
3 Comments so far
[...] This is the second article in a multi-part series on gas prices in the United States. You can read Part 1 of the Gas Price Series here. [...]
[...] is the 3rd article in a multi-part series on gas prices in the United States. You can read part 1 (Why Does Gas Cost So Much? here. You can read Part 2 (Gas Prices are Cheap in the US) of the Gas Price Series here [...]
my wife is always asking why does gas goes up and down i tell her i will found out can you please answer that question for me