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A Primer on Gasoline Prices
Gasoline,
one of the main products refined from crude oil, accounts for just
about 17 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 168,987 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.
Figure 1. What Do
We Pay For in a Gallon of Regular Grade?
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 2005 the price of crude oil averaged $50.23 per barrel, and crude
oil accounted for about 53 percent of the cost of a gallon of regular
grade gasoline (Figure 1). In comparison, the average price for crude
oil in 2004 was $36.98 per barrel, and it composed 47 percent 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.
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 19 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 21 cents per gallon.2
Also, 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 19 percent 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 9 percent 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, May 2005.
2Energy Information Administration, Petroleum
Marketing Monthly April 2006,
Table EN1 at:
http://www.iea.doe.gov/pub/oil_gas/petroleum/data_publications
petroleum_marketing_monthly/current/pdf/enote.pdf
Factors Behind the Increase in
Gasoline Prices in 2005
Since
the beginning of 2005, U.S. retail gasoline prices have been generaly
increasing, with the average price of regular gasoline rising from
$1.78 per gallon on January 3 to as high as $3.07 per gallon on
September 5, as Hurricane Katrina further tightened gasoline supplies.
But the hurricane is only one factor, albeit a dramatic one, which has
caused gasoline prices to rise in 2005.
A major factor influencing gasoline prices in 2005 was the increase in
crude oil prices. The price of West Texas Intermediate (WTI) crude oil,
which started the year at about $42 per barrel, reached $70 per barrel
in early September. Crude oil prices rose throughout 2004 and 2005, as
global oil demand increased dramatically, stretching capacity along the
entire oil market system, from crude oil production to transportation
(tankers and pipelines) to refinery capacity, nearly to its limits.
With minimal spare capacity in the face of the potential for
significant supply disruptions from numerous sources, oil prices were
high throughout 2005.
In addition, Hurricane Katrina had a devastating impact on U.S.
gasoline markets, initially taking out more than 25 percent of U.S.
crude oil production and 10-15 percent of U.S. refinery capacity. On
top of that, major oil pipelines that feed the Midwest and the East
Coast from the Gulf of Mexico area were shut down or forced to operate
at reduced rates for a significant period. With such a large drop in
supply, prices spiked dramatically. Because two pipelines that carry
gasoline were down initially, some stations actually ran out of
gasoline temporarily. However, once the pipelines were restored to full
capacity and some of the refineries were restarted, retail prices began
to fall. Increased gasoline imports in the fall of 2005, in part
stemming from the International Energy Agency’s emergency
release, also
added downward pressure to gasoline prices. However, retail prices are
likely to remain elevated as long as some refineries remain shut down
and the U.S. gasoline market continues to stretch supplies to their
limit.
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 5 percent higher than during the rest
of the year. If crude oil prices remain unchanged, gasoline prices
would typically increase by 10-20 cents from January to the summer.
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 40 percent of
the
world’s production of crude oil and holding more than
two-thirds of the
world’s estimated crude oil reserves. Additionally, increased
demand
for gasoline and other refined products in the United States and the
rest of the world is also exerting upward pressure on crude oil prices.
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. Additionally,
increased demand for gasoline and other petroleum products in the
United States and the rest of the world is also exerting upward
pressure on prices.
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.
Figure 2. Motor
Gasoline Prices at Retail Outlets, 2005 Average Regular Grade,
by
Region
(dollars
per gallon, including taxes)
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 United States 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. Con-sumers 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 more to produce than conventional gasoline served
elsewhere, increasing the price paid at the pump.
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.
Due
to the threat of groundwater contamination, the use of the gasoline
additive MTBE has been in the process of being phased-out for several
years. More than half of the States have already banned the use of
MTBE; the heaviest use of MTBE is currently in Texas and the Northeast,
exclusive of New York and Connecticut. In 2005, a number of petroleum
companies announced their intent to stop using MTBE in their gasoline
in 2006. This was due to perceived potential for increased liability
exposure due to the elimination of the oxygen content requirement for
reformulated gasoline (RFG) included in the Energy Policy Act of 2005.
Most of these companies will instead blend in ethanol to help replace
the octane and clean-burning properties of MTBE. The rapid switch from
MTBE to ethanol could have several impacts on the market that serve to
increase the potential for supply disruptions and subsequent price
volatility on a local basis. California faced temporary supply
dislocations and price volatility during the summer of 2003 as MTBE was
removed from gasoline in the State. Nevertheless, New York and
Connecticut had a relatively smooth transition phasing out MTBE in 2004
as a result of better preparation from the gasoline suppliers and
distributors. The supply and distribution system must undergo a number
of changes to switch from MTBE-blended RFG to ethanol blended RFG,
including developing supply chains to move more ethanol into
undersupplied areas, converting terminal tanks from petroleum to
ethanol, and adding blending equipment at terminals. It is expected
that reformulated gasoline areas on the East Coast, especially in the
Mid-Atlantic, will experience the most trouble obtaining ethanol
supplies in a timely fashion due to logistical challenges of getting
ethanol to and from terminals further inland by rail car. The
Dallas-Fort Worth and Houston areas may also experience some trouble
getting ethanol to major terminals due to limited rail access.
Operating costs
- Even stations located adjacent to each other have different traffic
patterns, rents, and sources of supply that influence retail price.
This
brochure is available at:
http://tonto.eia.doe.gov/reports/reportsD.asp?type=other
For links to current gasoline prices and analyses, see:
http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
The
Energy Information Administration(EIA) is an independent statistical
agency, within the U.S. Department of Energy. whose sole purpose is to
provide reliable and unbiased energy information.
For further
information, contact:
National Energy Information Center, NEIC
Energy Information Administration
1000 Independence Ave., SW
Washington, DC 20585
Telephone:
202.586.8800, 9:00am-5:00pm Eastern time.
E-mail:
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response is 3 business days.
Other
consumer-oriented brochures can be accessed on the Web at: http://tonto.eia.doe.gov/reports/reportsA.asp?type=other
EIA’s Web Site:
www.eia.doe.gov
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