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Exxon Informative - We are all concerned about this issue, High Gas prices - How gas prices work
How gas prices work
Let's see how it works?
Breakdown of Gas Prices
When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all of these entities have to get their slice of the pie.
Let's look at where your money goes when you pay for gas:
· Crude oil - The biggest portion of the cost of gas -- as of April 2007, that's about 50 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2004 (Source: U.S. DOE). And, after Hurricane Katrina, some prices were almost double that. In May 2007, crude-oil prices averaged around $60 per barrel (1 barrel = 45 gallons or 159.6 L).
Sometimes, gas prices go up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no one actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S., have to undergo costly retooling to handle it.
· Refining costs - The refining of crude oil makes up about 28 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.
· Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketing the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for about 8 percent of the price of gasoline.
· Taxes - Taxes, including federal and local, account for about 14 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 18.2 cents per gallon. There may also be some additional taxes, such as applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Add that to the state excise taxes, and it can average 27.4 cents. It could be worse. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6.65 per gallon, with 78 percent of that going to taxes.
· Station markup - While it isn't represented in the diagram above, of course some of the actual money you spend at the pump does go to the service station. Service stations add on a few cents per gallon. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.
Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.
World events, wars and weather can also raise prices. Anything that affects any part of the process, from the moment the oil is drilled, through refining and distribution to your car will result in a change in price. Military conflicts in parts of the world with lots of oil supplies can make it difficult for oil companies to drill and ship crude oil. Hurricanes have damaged offshore drilling platforms, coastal refineries and shipping ports that receive oil tankers. If a tanker itself is lost or damaged, or leaks its oil into the ocean, that will put a dent in the market as well.
The most recent surge in gas prices is due to several factors, including all of those listed above. However, a new reason emerged during the spring of 2007: legislation out of Washington to incorporate more ethanol into transportation fuels. There has been a call for enough increase in ethanol production to reduce daily oil imports by 1.5 million barrels by 2017. As the ethanol production increased refineries couldn't keep up the demand and had to import more oil. This added to the increase in price.
Unfortunately, the rise in prices may not be over. Several things could happen to keep driving up the price of gasoline: continuing tensions over Iran's nuclear talks, worse conditions in Nigeria or another active and devastating hurricane season [Source: The Washington Times].
Breakdown of Gas Prices
When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all of these entities have to get their slice of the pie.
Let's look at where your money goes when you pay for gas:
· Crude oil - The biggest portion of the cost of gas -- as of April 2007, that's about 50 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2004 (Source: U.S. DOE). And, after Hurricane Katrina, some prices were almost double that. In May 2007, crude-oil prices averaged around $60 per barrel (1 barrel = 45 gallons or 159.6 L).
Sometimes, gas prices go up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no one actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S., have to undergo costly retooling to handle it.
· Refining costs - The refining of crude oil makes up about 28 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.
· Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketing the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for about 8 percent of the price of gasoline.
· Taxes - Taxes, including federal and local, account for about 14 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 18.2 cents per gallon. There may also be some additional taxes, such as applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Add that to the state excise taxes, and it can average 27.4 cents. It could be worse. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6.65 per gallon, with 78 percent of that going to taxes.
· Station markup - While it isn't represented in the diagram above, of course some of the actual money you spend at the pump does go to the service station. Service stations add on a few cents per gallon. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.
Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.
World events, wars and weather can also raise prices. Anything that affects any part of the process, from the moment the oil is drilled, through refining and distribution to your car will result in a change in price. Military conflicts in parts of the world with lots of oil supplies can make it difficult for oil companies to drill and ship crude oil. Hurricanes have damaged offshore drilling platforms, coastal refineries and shipping ports that receive oil tankers. If a tanker itself is lost or damaged, or leaks its oil into the ocean, that will put a dent in the market as well.
The most recent surge in gas prices is due to several factors, including all of those listed above. However, a new reason emerged during the spring of 2007: legislation out of Washington to incorporate more ethanol into transportation fuels. There has been a call for enough increase in ethanol production to reduce daily oil imports by 1.5 million barrels by 2017. As the ethanol production increased refineries couldn't keep up the demand and had to import more oil. This added to the increase in price.
Unfortunately, the rise in prices may not be over. Several things could happen to keep driving up the price of gasoline: continuing tensions over Iran's nuclear talks, worse conditions in Nigeria or another active and devastating hurricane season [Source: The Washington Times].
Comments:
Posted by Lidman on 2008-04-01:
For more information check out this site:
http://auto.howstuffworks.com/gas-price.htm
http://auto.howstuffworks.com/gas-price.htm
Posted by MRM on 2008-04-01:
Lidman, thanks for the informative article! There were some facts that I did not know about and now I know!
Posted by Lidman on 2008-04-01:
MRM, check out the site it came from there is a lot more information that is very informative.
Posted by Ghost of Doc J on 2008-04-01:
"It could be worse. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6.65 per gallon, with 78 percent of that going to taxes."
Alas, Liddy, the taxes are actually much higher...because you only included the taxes paid directly for gasoline as a product. Taxes are piled on at every stage of the process.
The largest contributor to high gas prices is our government. We have not built a new refinery in 30 years...because environmental regs make it unprofitable to build them. Baloney concerns about 'the planet' require refiners to produce a myriad of formulas...each with dubious benefits except to add cost.
Also, 'it could be worse' and citing how much gas costs in socialist worker's paradises is like asking "Would you rather be shot, or electricuted?' Either way, the outcome is the same. Nice post, Lid...you left me an opening!
Alas, Liddy, the taxes are actually much higher...because you only included the taxes paid directly for gasoline as a product. Taxes are piled on at every stage of the process.
The largest contributor to high gas prices is our government. We have not built a new refinery in 30 years...because environmental regs make it unprofitable to build them. Baloney concerns about 'the planet' require refiners to produce a myriad of formulas...each with dubious benefits except to add cost.
Also, 'it could be worse' and citing how much gas costs in socialist worker's paradises is like asking "Would you rather be shot, or electricuted?' Either way, the outcome is the same. Nice post, Lid...you left me an opening!
Posted by MRM on 2008-04-01:
Doc J, thanks for enlightening your readers on your informative comment. Drivers need to change their driving habits so that their gas tank will not empty so quickly.
Posted by Ghost of Doc J on 2008-04-01:
No, thank you Lidman! You provided the opening.
Posted by superbowl on 2008-04-01:
Just proves the Fed's will not help lower fuel costs as it is like a private piggy bank for them. (VH info)
Posted by Lidman on 2008-04-01:
Doc, not only do I agree but I have posted that same thing you are talking many times and most people just don't get it so I thought this might be a better place to start, if you know what I mean.
The government for one will never stop to help the people of this country because they in fact, make more money off the gas then the oil companies do, I am talking Fed', states, and local.
The government for one will never stop to help the people of this country because they in fact, make more money off the gas then the oil companies do, I am talking Fed', states, and local.
Posted by Stew.old on 2008-04-01:
Lidman - Quit trying to steal Doc J's thunder. Your post was good but it's no wheres close to "Doc J" quality.
Posted by Lidman on 2008-04-01:
Oh, and on the issue of refinery's lets give credit where credit is due. The so-called special interest groups are the only reason this country has not built new refineries or drilled for new oil.
Something must be done about the stupidity in this country before we are sold to the highest bidder, wait I think we already have been?
Something must be done about the stupidity in this country before we are sold to the highest bidder, wait I think we already have been?
Posted by Lidman on 2008-04-01:
Stew, I am agreeing with the Doc and just adding to his excellent post.
The good Doc has a way with words you and I both wish we could at least imitate.
The good Doc has a way with words you and I both wish we could at least imitate.
Posted by tnchuck100 on 2008-04-01:
Where is the percentage that all the high paid CEO's and other executives and Bush's cut? Is that in the 50% of CRUDe?
Posted by dealerdirect on 2008-04-01:
Nice article, but someone please explain this one to me. Diesel fuel and home heating fuel is less refined than gasoline correct??? Then why is it almost a dollar more a gallon???
Posted by Stew.old on 2008-04-01:
dd -- Aren't you the one who said supply and demand dictate the price.. wouldn't that apply to diesel as well?
Posted by dealerdirect on 2008-04-01:
true, but refining diesel in theory should be less than gasoline
Posted by Slimjim on 2008-04-01:
For quite some time, I remember diesel was always less expensive than gasoline. That and the extra mileage were the things that sparked all those diesel cars being sold in the 70s and early 80s
Posted by Stew.old on 2008-04-01:
I got this from the DOE .. If you can't believe the DOE who can you believe.
"Why are diesel fuel prices higher than gasoline prices?
Until several years ago, the average price of diesel fuel was usually lower than the average price of gasoline. In some winters when the demand for distillate heating oil was high, the price of diesel fuel rose above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the U.S., putting more pressure on the tight global refining capacity. In the U.S., the transition to low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline. "
"Why are diesel fuel prices higher than gasoline prices?
Until several years ago, the average price of diesel fuel was usually lower than the average price of gasoline. In some winters when the demand for distillate heating oil was high, the price of diesel fuel rose above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the U.S., putting more pressure on the tight global refining capacity. In the U.S., the transition to low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline. "
Posted by dealerdirect on 2008-04-01:
That explains maybe a few cents a gallon more, but my point being whether it is gasoline or diesel it still comes from the same barrel of oil. Refining cost should be lower to produce diesel because of less refining needed to be done on the end product. So why is it $.87 higher than gasoline?? (current pricing of the gas station across the street from my office)
Posted by FoggyOne on 2008-04-01:
You can break down the cost anyway you want but the oil companies are making BIG BIG profits. They don't care how high the price of gas is as long as they can still sell it. They have a captive audience and they know it. This isn't a case of Supply and Demand but pure manipulation by OPEC and the oil companies. And using ethanol (obtained from grain) is already forcing grain prices up, so food costs more. The more enthanol used means the less grain for consumption (by cattle or people). I'm on a roll now - and the stupid American people (me included) still drive a lot. I could walk or ride my bike but drive instead, take little trips on the weekend, etc. At least I have the opportunity to work from home 1 day a week to cut down on my gas wastage commuting. And, why does the price of gas jump after something said in Iran? It would take months for any cut back by Iran to affect the US so the prices are based on 'what will happen' rather than 'what is happening'. If you made it this far in my tirade, Thanks.
Posted by Ghost of Doc J on 2008-04-01:
Remember folks, the more "Big Oil" or "Big Vegetables", or "Big Anything" is taxed in order to create a mythical level playing field, the more those 'Big Whatevers' will pass on the cost of those taxes to the consumers. For them, taxes are a zero-sum game. As I write, the tax-and-spenders are already plotting to add up to a dollar in tax to 'pay for decaying infrastructure'...which decayed because the transportation fund was squandered by these same tax-and-squanderers!
Posted by Lidman on 2008-04-01:
Domestic Supplies
After seeing how much oil the United States imports, it may be surprising to know that the United States is the world's third largest producer of crude oil. The biggest production region is around the Gulf of Mexico, and the largest producing state is Texas. The Gulf Coast region is home to two important producing areas: the Permian Basin, located in west-central Texas and eastern New Mexico, and the federal offshore portion of the Gulf. Other big oil-producing states include Alaska, Louisiana, California, Oklahoma and Arizona.
Even with the United States producing so much oil, it is still heavily dependent on foreign sources. It's that dependence that crippled the country during the oil embargo of 1973 and 1974. To make sure that this situation never happens again, the federal government formed the Strategic Petroleum Reserve (SPR). While most domestic oil is sent directly to refineries and then to the consumer market, some of it is held back and sent to the SPR.
As of May 24, 2007, the SPR stores about 690 million barrels of oil in underground salt caverns along the Gulf of Mexico [Source: Department of Energy]. Given that the United States imports about half of its oil, the Strategic Petroleum Reserve holds about a 60-day supply of oil if all imports were suddenly and totally cut off. See What is the Strategic Petroleum Reserve? for more information about how the storage sites work.
After seeing how much oil the United States imports, it may be surprising to know that the United States is the world's third largest producer of crude oil. The biggest production region is around the Gulf of Mexico, and the largest producing state is Texas. The Gulf Coast region is home to two important producing areas: the Permian Basin, located in west-central Texas and eastern New Mexico, and the federal offshore portion of the Gulf. Other big oil-producing states include Alaska, Louisiana, California, Oklahoma and Arizona.
Even with the United States producing so much oil, it is still heavily dependent on foreign sources. It's that dependence that crippled the country during the oil embargo of 1973 and 1974. To make sure that this situation never happens again, the federal government formed the Strategic Petroleum Reserve (SPR). While most domestic oil is sent directly to refineries and then to the consumer market, some of it is held back and sent to the SPR.
As of May 24, 2007, the SPR stores about 690 million barrels of oil in underground salt caverns along the Gulf of Mexico [Source: Department of Energy]. Given that the United States imports about half of its oil, the Strategic Petroleum Reserve holds about a 60-day supply of oil if all imports were suddenly and totally cut off. See What is the Strategic Petroleum Reserve? for more information about how the storage sites work.
Posted by Lidman on 2008-04-01:
Dealer, you are 100% correct in assuming that it is a game and a fares. Diesel fuel in fact is basically the crap that is left over when all the rest is done; it is the lowest grade of fuel. But to see how they are screwing us it should be noted that UN-leaded fuel also cost a lot less to produce them it's counter part leaded fuel which is no longer made.
When they were doing the transition to unleaded fuel the scam was then as it is now, supply and demand. To make unleaded fuel you simply don't add led and a few other things, hence it cost less to produce. But the just started raising the price long before it was mandatory for all cars to have unleaded gas. That was so they wouldn't lose anything they already made.
The thing with diesel fuel is they found they could get away with it so they do. But that is just the whole thing in English and not based on the economics of the way things work.
And as you can see by this review compaired to McD's, not many people are interested in how thing work, just how to complain.
When they were doing the transition to unleaded fuel the scam was then as it is now, supply and demand. To make unleaded fuel you simply don't add led and a few other things, hence it cost less to produce. But the just started raising the price long before it was mandatory for all cars to have unleaded gas. That was so they wouldn't lose anything they already made.
The thing with diesel fuel is they found they could get away with it so they do. But that is just the whole thing in English and not based on the economics of the way things work.
And as you can see by this review compaired to McD's, not many people are interested in how thing work, just how to complain.
Posted by Lidman on 2008-04-01:
Dealer here is a site with an explanation that mite help well, maybe to prove what I just said as well. This is the last part of it but please go and read the rest.
“The EIA has a helpful "Frequently Asked Questions" posting on its Web site that addresses the question, "Why are diesel prices so high?" To summarize the answer: Yada yada yada…distillate fuel production…lower than typical…heating oil…vote Republican…largest determinate for future path…yada yada, and, in conclusion, yada.
The light at the end of the tunnel is Willie Nelson
But there may be relief in sight, thanks to Willie Nelson. Willie is a backer of "BioWillie," a biodiesel fuel made from seeds and stems and probably soybeans. After all, Rudolph Diesel, who invented the engine, used to run his on peanut oil. Adding biodiesel to regular diesel might cut the cost per gallon. Or not. Anyway, Willie Nelson backs his own brand, BioWillie, which is sold at truck stops "all over the country," which means six places in Texas, and one each in California, Georgia and South Carolina, but if you log on to www.biowillie.com, you can buy a BioWillie computer mouse pad for $15.99.
I'm not sure any of this helps Ted Haberkorn. But this might: I asked a friend who is in the petroleum industry why they charge so much for diesel.
"Because we can," he said.
That, I understand.”
http://www.edmunds.com/insideline/do/Columns/articleId=108465
“The EIA has a helpful "Frequently Asked Questions" posting on its Web site that addresses the question, "Why are diesel prices so high?" To summarize the answer: Yada yada yada…distillate fuel production…lower than typical…heating oil…vote Republican…largest determinate for future path…yada yada, and, in conclusion, yada.
The light at the end of the tunnel is Willie Nelson
But there may be relief in sight, thanks to Willie Nelson. Willie is a backer of "BioWillie," a biodiesel fuel made from seeds and stems and probably soybeans. After all, Rudolph Diesel, who invented the engine, used to run his on peanut oil. Adding biodiesel to regular diesel might cut the cost per gallon. Or not. Anyway, Willie Nelson backs his own brand, BioWillie, which is sold at truck stops "all over the country," which means six places in Texas, and one each in California, Georgia and South Carolina, but if you log on to www.biowillie.com, you can buy a BioWillie computer mouse pad for $15.99.
I'm not sure any of this helps Ted Haberkorn. But this might: I asked a friend who is in the petroleum industry why they charge so much for diesel.
"Because we can," he said.
That, I understand.”
http://www.edmunds.com/insideline/do/Columns/articleId=108465
Posted by qualityappliance on 2008-04-01:
I was not going to comment on this post until read the un-informed statement, "To make unleaded fuel you simply don't add led and a few other things, hence it cost less to produce.". That would be fine if you want to try to run 82 octane fuel in your vehicle. The additive was refered to as TEL, (tetra-ethel-lead), which was primarily an anti knock component, ie octane booster. In order to increase the octane rating of the fuel, the refining process had to be intensified thereby increasing the cost of production. also was the beginning of the use of the term "ethel" for
Posted by Lidman on 2008-04-02:
So let me get this straight there qualityappliance, you weren't going to comment on this till you THINK you found some "un-informed statement". Well pal why do you just not comment and that way you would put your foot in your mouth. This is one of the most arrogant, stupid statements I have read in a while and you are so far of base it's a wonder to me why you would post it unless you have some need to let the world know you think you know more then the rest.
Posted by qualityappliance on 2008-04-02:
Sorry pal, but this is a subject that I am quite knowledgable about. This is from your own linked reference.
http://auto.howstuffworks.com/question90.htm
Apology accepted.
http://auto.howstuffworks.com/question90.htm
Apology accepted.
Posted by Lidman on 2008-04-02:
Sorry Palett, there will be NO apology because there was no "un-informed statement" and you admit it by showing I posted the link to the information therefore, you are at fault here and should apology ASAP!
I know tons about this subject as well my friend, Now just say you are sorry and all will be well.
Thank you in advance
I know tons about this subject as well my friend, Now just say you are sorry and all will be well.
Thank you in advance
Posted by qualityappliance on 2008-04-03:
O.K. Please explain what constitutes an octane rating of gasoline, what changes it, and how it is tested?
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