Mortgage Insights Blog

I know that every time I pass by a fuel station lately I cringe at the thought of having to fill up. So I decided to do a little research and find out exactly why I’m currently spending almost $4.00 per gallon at the pump. Here is what I discovered:

In the United States there are basically 5 categories of costs built into our gas prices. The gas you pump at your local station breaks down as follows:

• Taxes - 12% of the cost per gallon goes to cover Federal and state level taxes, along with fees for oil inspection, storage and environmental protection.
• Distribution & Marketing – 7% covers the cost of transportation and distribution of both the finished product, the gasoline you pump into your car’s holding tank, and the unrefined crude oil. Also passed on to the customer is a share of each oil company’s marketing expenses.
• Refining – 9% but will vary depending on the quality of crude oil that refineries process into gasoline
• Crude Oil – 71% the biggest portion goes to companies that extract crude oil from the ground
• Markup – 1% or less, service stations typically add on a few cents per gallon, though some ad more. Markup laws in some states actually bar stations from charging less than a certain percentage. These laws are enforced to protect individually owned gas stations from being driven out of business by larger chains.

So now that we know what we are paying for at the pump in each gallon of gasoline, what exactly causes the prices to change so often?

Since gasoline is made from crude oil, the global crude oil production, especially by OPEC (Organization of the Petroleum Exporting Countries), is the biggest factor in price of a barrel of oil. When the market tightens, supply is reduced, and prices go up.

Since crude oil is traded globally in increments of the US dollar, as the value of the dollar falls in comparison to international currencies, oil-exporting countries can demand more dollars per barrel to meet expenses paid in other currencies.

The demand and consumption of developing countries is a growing factor. For instance, China and India, two heavily populated and rapidly developing countries account for more than 70 percent of the increase of global oil consumption this year. And China’s imports have doubled over the past 5 years alone.

The cost of transportation to carry both the crude oil from the exporting country’s to the importing country’s refineries and then to transport the final product to your local Shell station directly impacts the cost you pay at the pump. And when gas costs more for other reasons, it directly causes the cost of transporting gas to increase…think about that one.

Unforeseen events such as Natural disasters, war and political instability can interfere with oil production and demand which causes gas prices to rise. The Arab oil embargo in 1973 and 1974, the Iranian revolution in 1978, the Iran-Iraq war in the 1980’s, the Persian Gulf conflict in 1990 and 1991, and the current conflict in Iraq. Not to mention hurricane Katrina and other storms.

Ever changing Federal and State specific taxes on gas as well as competition among local gas stations contribute to the smallest variation in gasoline prices at the pump.