Understanding the Price of Gasoline Why do gas prices seem to fluctuate wildly from week to week? From the viewpoint of the average consumer, it really doesn't make sense. How can a commodity product increase so much in price over such a short period of time? Let's see if we can figure out what's going on. There are several factors that contribute to the cost of a gallon of gasoline: 1. The cost of crude oil. The cost of crude accounts for approximately 70% of the cost of gasoline. This is by far the largest component. In turn there are several factors that determine the cost of crude oil. * Locating and acquiring the crude oil. It has to be found and taken out of the ground. * Transportation. Once the crude oil is obtained, it must be transported to a refining facility. * Profit. Some companies only find and drill for crude; they do not refine the oil themselves. These companies have to sell at a profit to stay in business. 2. Refining the oil accounts for 5-7% of the cost of gasoline. This includes the refining process, as well as the transportation to gas stations and the profit. Did you know that gas stations frequently sell gasoline from other companies? Your local Shell station might actually get its gas from BP. * There's probably not a good reason to be loyal to a specific company unless you have a gas card, all things considered. 3. Sales and marketing. This is about 10% of the cost. It's the cost of building and running the gas stations. It also includes the profit. 4. Taxes. Taxes account for about 15% of the cost of gasoline. These are both federal and state taxes. Now that you understand the basic costs, let's examine why they can vary so much. The cost of crude oil is the largest influencer of gas prices. Natural disasters, like hurricane Katrina, can have a serious impact on the supply of crude oil. As you remember from economics 101, when the supply goes down, the demand goes up. When crude oil supplies are diminished, the refining companies are willing to pay more to get the crude oil they need. When their costs go up, the price of gasoline goes up. By the same token, when a disaster disrupts refining capacity, the supply of gasoline goes down. Gas stations are forced to pay more, so we all pay more - another case of supply and demand. More Considerations That Affect Price Certainly you've noticed that there has to be more to it than just supply and demand or inflation. Starting with the price for gasoline from the 1960's and adjusting for inflation, the price of gasoline should be under $2.00 / gallon. But it's not! These factors also contribute to the rising cost of gasoline: 1. The easy-to-get-to oil has been used. It is considerably more difficult and expensive today to find and obtain the crude oil. So the oil companies are spending more just to acquire it. 2. The quality of the crude oil is lower. This makes refining oil more expensive since it requires more expensive processing. 3. There are more political issues. Political uncertainty in the Middle East makes crude supplies more uncertain. 4. Speculation by investors. Many experts believe that institutional investors are driving up the price by speculating on future crude oil supplies. The experts say that high gas prices are here to stay, and we will never enjoy sub $2.00 gasoline again. While you might not like it, at least you now have some understanding of the factors that influence your cost at the pump.