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What factors contribute to the price of gas?

Although plummeting oil prices can be cited as the main reason for low gasoline prices, the friendly price at the pump can’t be attributed only to low crude prices. And surprisingly, Brent crude prices affect gasoline prices more than West Texas Intermediate (WTI) prices, typically named as the benchmark for oil prices. However, according to the Energy Information Administration (EIA), other factors also influence regional wholesale and retail gasoline prices.

High inventories are a major contributing impact on regional gasoline prices. During mid-winter, high inventories are not uncommon in preparation for upcoming seasonal refinery maintenance and lower winter demand. Winter usually results in less driving due to weather conditions. Prices typically rise about 5 percent in early spring through the summer season as more people take to the roads for vacations and day trips, with small, sharp increases over Memorial Day and the Fourth of July holiday weekends. The current inventory build, including a 2.91 million barrel increase at the storage hub located in Cushing, Oklahoma, prompted the EIA to announce the “largest build in U.S. crude stocks in at least 14 years.” Despite major cutbacks by oil companies across unconventional shale plays, production continues to stay high. Fewer wells and fewer employees doesn’t necessarily equate to less production. The oil glut doesn’t look like it’s going to disappear anytime soon.

What we pay for in a gallon of gas. (Source: E.I.A)

What we pay for in a gallon of gas. E.I.A graph.

Refining costs and profits also influence how much gas at the pump costs. Typically, refining costs and profits make up about 15 percent of the retail price of gasoline, according to The Mississippi Petroleum Marketers and Convenience Stores Association. The EIA reports a slightly lower percentage, citing only 10 percent going to the cost of refining. These costs vary across the United States. Processing technology in addition to the type of crude used to make the gasoline determine how cost effective the refining process is. For example, gasoline that is blended with ethanol is also determined by the price of corn, which has dropped in price from 2012-13 to its current price. Refineries also have the advantage of huge stocks of oil in the United States, since crude currently by law can’t be exported. Domestic producers can’t export the oil, leaving it solely for processing at U.S. refineries. Oil can be obtained more cheaply, thus giving refineries a still-high profit margin, sometimes called a “crack spread,” while still passing on a portion of that savings to the consumer.

Some regions have higher gas prices because they have higher local and state taxes. The federal excise tax is currently 18.4 cents per gallon. In 2014, state excise taxes averaged around 24.17 cents per gallon. However, cities and counties can also impose taxes on gasoline at the pump, making it more expensive drive in California, which increased its tax to 39.5 cents per gallon on July 1, 2013. New York, Connecticut, and Hawaii follow California as the states with the highest rates of gasoline taxes. Pennsylvania has no state excise tax, but other fees imposed add an additional 41.8 cents to each gallon of gas sold.

The last major factors that affect the price of gas are distribution and marketing. While the EIA states approximately 26 percent of the current cost of a gallon of gasoline goes to distribution and marketing, this number has increased significantly since 2012, when that estimate was closer to six percent.

Currently, gas prices have remained low nationwide. According to GasBuddy.com, the average retail price for a gallon of gas a year ago was around $3.30 per gallon. By April of last year, the price hit $3.70 and remained close to that price until mid-July. Since that time, the price of gas has dropped continuously, hitting a national average of $2.04 cents as of today, January 23, 2015. In some places, the price has dipped below $1.50. In Texas, the average price has crept back up slightly, up 10 cents today, to $1.85 per gallon. Other state averages include the following: North Dakota–$2.04, Colorado–$1.90, Pennsylvania–$2.28, Minnesota–$1.95, California–$2.47, Louisiana–$1.88, Hawaii–$3.28, Edomonton, Alberta—65.9 cents/litre.

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