The Components of Gas Prices

Most business are concerned about the recent rise in the price of gas, even beyond trucking companies.  When we purchase a gallon of gas, where does that cost go?

The cost of a gallon of diesel fuel is determined by several factors. Several entities get a piece of the pie, not just the oil companies. Crude oil has to be refined, distributed and marketed and also is taxed by states and the federal government. All of these factors contribute to the final cost at the pump.

 

61% of the cost of crude oil goes to the suppliers. The Organization of Petroleum Exporting Countries, aka OPEC, sets the price for crude oil. The amount of oil that these countries produce determines the price per barrel. As demand increases, the crude oil price rises. Worldwide natural disasters and political unrest also usually force the price upwards. Robust oil futures trading also affects the price of crude oil.

Refining costs account for 15% of the price for a barrel of crude oil. The cost of refining diesel fuel is higher than refining gasoline, resulting in a higher price at the pump. There are two types of crude oil, light sweet and heavy sour crude. Light sweet crude is more economical to refine than heavy sour crude. There is more heavy sour crude available on the market, but U.S. refineries must invest in costly retooling to process it.

Distribution and marketing demand 10% of the pie. Crude oil is transported to refineries where it is processed. It then goes to distribution locations where it is delivered to service stations. Delivery is through ocean shipping and trucking to the final destination.  Advertising oil company brands and transportation costs contribute to the final cost at the pump.

Then there are taxes. 14% of the cost of diesel fuel goes to taxation. State gas/diesel taxes vary from state to state. The federal tax remains fixed at one rate nationwide. Underground storage tank and environmental fees add to the tax base.

Service stations must make a profit as well. They typically add a few cents per gallon over their costs. Some states have minimum pricing regulations in place so that larger companies can not undercut smaller companies and create an unfair marketplace. Competition from nearby service stations usually affects the cost per gallon. The distance service stations are from refineries also affects transportation costs.

Anything that effects a part of the crude oil producing process will affect prices at the pump. Prices fluctuate daily due to demand, natural disasters, political unrest, offshore drilling accidents, oil tanker leaks and tax increases. Oil is the lifeblood of industrialized economies around the world. Demand is certain to increase as the world population grows.

 

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