| | A Primer on Gasoline
Prices
Gasoline,
one of the main products refined from
crude oil, accounts for just about 16
percent of the energy consumed in the
United States. The primary use for
gasoline is in automobiles and light
trucks. Gasoline also fuels boats,
recreational vehicles, and various farm
and other equipment. While gasoline is
produced year-round, extra volumes are
made in time for the summer driving
season. Gasoline is delivered from oil
refineries mainly through pipelines to a
massive distribution chain serving 168,000
retail gasoline stations throughout the
United States.1 There are three
main grades of gasoline: regular,
mid-grade, and premium. Each grade has a
different octane level. Price levels vary
by grade, but the price differential
between grades is generally constant.
What are the components of
the retail price of gasoline?
The cost to produce and
deliver gasoline to consumers includes the
cost of crude oil to refiners, refinery
processing costs, marketing and distribution
costs, and finally the retail station costs
and taxes. The prices paid by consumers at
the pump reflect these costs, as well as the
profits (and sometimes losses) of refiners,
marketers, distributors, and retail station
owners.
In 2002, the price of crude
oil averaged $24.09 per barrel, and crude
oil accounted for about 43% of the cost of a
gallon of regular grade gasoline (Figure 1).
In comparison, the average price for crude
oil in 2001 was $22.95 per barrel, and it
composed 38% of the cost of a gallon of
regular gasoline. The share of the retail
price of regular grade gasoline that crude
oil costs represent varies somewhat over
time and among regions.
Figure 1. What Do We
Pay for in a Gallon of Regular Grade?
Federal, State, and local
taxes are a large component of the retail
price of gasoline. Taxes (not including
county and local taxes) account for
approximately 31 percent of the cost of a
gallon of gasoline. Within this national
average, Federal excise taxes are 18.4 cents
per gallon and State excise taxes average
about 20 cents per gallon.2Also,
eleven States levy additional State sales
and other taxes, some of which are applied
to the Federal and State excise taxes.
Additional local county and city taxes can
have a significant impact on the price of
gasoline.
Refining costs and profits
comprise about 13% of the retail price of
gasoline. This component varies from region
to region due to the different formulations
required in different parts of the country.
Distribution, marketing and
retail dealer costs and profits combined
make up 13% of the cost of a gallon of
gasoline. From the refinery, most gasoline
is shipped first by pipeline to terminals
near consuming areas, then loaded into
trucks for delivery to individual stations.
Some retail outlets are owned and operated
by refiners, while others are independent
businesses that purchase gasoline for resale
to the public. The price on the pump
reflects both the retailer's purchase cost
for the product and the other costs of
operating the service station. It also
reflects local market conditions and
factors, such as the desirability of the
location and the marketing strategy of the
owner.
1National
Petroleum News, Volume 95, 5, May 2003, p.
6.
2Energy Information
Administration,
Petroleum Marketing Annual 2002,
see Table EN1. Federal and State Motor
Gasoline Taxes
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Why are California gasoline prices
higher and more
variable than others?
The State of
California operates its own
reformulated gasoline program with
more stringent requirements than
Federally-mandated clean gasolines. In
addition to the higher cost of cleaner
fuel, there is a combined State and
local sales and use tax of 7.25
percent on top of an 18.4
cent-per-gallon federal excise tax and
an 18.0 cent-per-gallon State excise
tax. Refinery margins have also been
higher due in large part to price
volatility in the region.
California prices are more variable
than others because there are
relatively few supply sources of its
unique blend of gasoline outside the
State. California refineries need to
be running near their fullest
capabilities in order to meet the
State's fuel demands. If more than one
of its refineries experiences
operating difficulties at the same
time, California's gasoline supply may
become very tight and the prices soar.
Supplies could be obtained from some
Gulf Coast and foreign refineries;
however, California's substantial
distance from those refineries is such
that any unusual increase in demand or
reduction in supply results in a large
price response in the market before
relief supplies can be delivered. The
farther away the necessary relief
supplies are, the higher and longer
the price spike will be.
California was one of the first states
to ban the gasoline additive methyl
tertiary butyl ether (MTBE) after it
was detected in ground water. Ethanol,
a non-petroleum product usually made
from corn, is being used in place of
MTBE. Gasoline without MTBE is more
expensive to produce and requires
refineries to change the way they
produce and distribute gasoline. Some
supply dislocations and price surges
occurred in the summer of 2003 as the
State moved away from MTBE. Similar
problems have also occurred in past
fuel transitions. |
Why do gasoline prices
fluctuate?
Even when crude oil prices
are stable, gasoline prices normally
fluctuate due to factors such as
seasonality and local retail station
competition. Additionally, gasoline prices
can change rapidly due to crude oil supply
disruptions stemming from world events, or
domestic problems such as refinery or
pipeline outages.
Seasonality in the
demand for gasoline - When crude oil
prices are stable, retail gasoline prices
tend to gradually rise before and during
the summer, when people drive more, and
fall in the winter. Good weather and
vacations cause U.S. summer gasoline
demand to average about 6% higher than
during the rest of the year. If crude oil
prices remain unchanged, gasoline prices
would typically increase by 5-6 cents from
January to the summer.
Figure 2. Motor
Gasoline Prices at Retail Outlets, 2002
Average Regular
Grade, by
Region
(dollars per gallon, including taxes)
Changes in the cost of
crude oil - Events in crude oil
markets were a major factor in all but one
of the five run-ups in gasoline prices
between 1992 and 1997, according to the
National Petroleum Council's study, U.S.
Petroleum Supply - Inventory Dynamics.
About 47 barrels of gasoline are produced
from every 100 barrels of crude oil
processed at U. S. refineries, with other
refined products making up the remainder.
Crude oil prices are
determined by worldwide supply and demand,
with significant influence by the
Organization of Petroleum Exporting
Countries (OPEC). Since it was organized
in 1960, OPEC has tried to keep world oil
prices at its target level by setting an
upper production limit on its members.
OPEC has the potential to influence oil
prices worldwide because its members
possess such a great portion of the
world's oil supply, accounting for about
38% of the world's production of crude oil
and holding more than two-thirds of the
world's estimated crude oil reserves.
Rapid gasoline price
increases have occurred in response to
crude oil shortages caused by, for
example, the Arab oil embargo in 1973, the
Iranian revolution in 1978, the Iran/Iraq
war in 1980, and the Persian Gulf conflict
in 1990. Gasoline price increases in
recent years have been due in part to OPEC
crude oil production cuts, turmoil in key
oil producing countries, and problems with
petroleum infrastructure (e.g., refineries
and pipelines) within the United States.
Product supply/demand
imbalances - If demand rises quickly
or supply declines unexpectedly due to
refinery production problems or lagging
imports, gasoline inventories (stocks) may
decline rapidly. When stocks are low and
falling, some wholesalers become concerned
that supplies may not be adequate over the
short term and bid higher for available
product. Such imbalances have occurred
when a region has changed from one fuel
type to another (e.g., to cleaner-burning
gasoline) as refiners and marketers adjust
to the new product.
Gasoline may be less
expensive in one summer when supplies are
plentiful vs. another summer when they are
not. These are normal price fluctuations,
experienced in all commodity markets.
However, prices of basic
energy (gasoline, electricity, natural
gas, heating oil) are generally more
volatile than prices of other commodities.
One reason is that consumers are limited
in their ability to substitute between
fuels when the price for gasoline, for
example, fluctuates. So, while consumers
can substitute readily between food
products when relative prices shift, most
do not have that option in fueling their
vehicles.
Why do gasoline prices differ
according to region?
Although price levels vary over time,
Energy Information Administration (EIA)
data indicate that average retail gasoline
prices tend to typically be higher in
certain States or regions than in others
(Figure 2). Aside from taxes, there are
other factors that contribute to regional
and even local differences in gasoline
prices:
Proximity of supply -
Areas farthest from the Gulf Coast (the source
of nearly half of the gasoline produced in the
U.S. and, thus, a major supplier to the rest
of the country), tend to have higher prices.
The proximity of refineries to crude oil
supplies can even be a factor, as well as
shipping costs (pipeline or waterborne) from
refinery to market.
Supply disruptions -
Any event which slows or stops production of
gasoline for a short time, such as planned or
unplanned refinery maintenance, can prompt
bidding for available supplies. If the
transportation system cannot support the flow
of surplus supplies from one region to
another, prices will remain comparatively
high.
Competition in the local
market - Competitive differences can be
substantial between a locality with only one
or a few gasoline suppliers versus one with a
large number of competitors in close
proximity. Consumers in remote locations may
face a trade-off between higher local prices
and the inconvenience of driving some distance
to a lower-priced alternative.
Environmental programs
- Some areas of the country are required to
use special gasolines. Environmental programs,
aimed at reducing carbon monoxide, smog, and
air toxics, include the Federal and/or State
required oxygenated, reformulated, and
low-volatility (evaporates more slowly)
gasolines. Other environmental programs put
restrictions on transportation and storage.
The reformulated gasolines required in some
urban areas and in California cost at least
three cents more per gallon to produce than
conventional gasoline served elsewhere,
increasing the price paid at the pump.
Seventeen states have passed
legislation to restrict the use of the
gasoline additive MTBE, but of these, only
California, Connecticut, Kentucky, Missouri,
and New York relied on the additive to begin
with. MTBE removal requires large changes to
gasoline production and distribution.
California faced temporary supply dislocations
and price volatility during the summer of 2003
as MTBE was removed from gasoline in the
State. Other states may face similar issues as
they make the transition to gasoline without
MTBE.
Operating costs - Even
stations co-located have different traffic
patterns, rents, and sources of supply that
influence retail price.
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Chicago-Milwaukee
Gasoline
Like California, the
Chicago-Milwaukee area uses a
reformulated gasoline that is unique to
the region. Most of this reformulated
gasoline is produced using ethanol,
whereas until recently, reformulated
gasoline in other parts of the country
used MTBE. Not many refineries could
produce reformulated gasoline materials
for mixing with ethanol, leaving few
suppliers that were able to provide
gasoline to this region. This has made
the region susceptible to price spikes
in recent years when regional pipeline
or refinery problems have occurred.
Price spikes have been especially
dramatic when the region has been caught
without an adequate stock cushion to
absorb unexpected events. |
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