What Affects the Price We Pay for Gas
By: Good2GoPublished: February 9, 2015
Gas prices have been dropping. Like millions of other Americans I’m sure you’ve noticed the momentum shift. The change has left a smile on your face and a few extra bucks in your pocket. For the first time in years a $10 bill can legitimately be considered “gas money”.What has caused this drop in prices and even more importantly, how long will it last?
Factors that Determine the Price We Pay for Gas
Crude Oil Prices
The price of crude oil is the single most important determinate in U.S. gas prices. The U.S. Energy Information Administration (EIA) states that roughly two-thirds of the cost of gas can be directly attributed to the cost of crude oil.
It’s important to remember gasoline, like all other products, requires marketing. Take your favorite soda brand for example. Regardless of how great the soda tastes, or how affordable it is, there needs to be a marketing aspect of the business to ensure sales. The gas industry is no different. There are numerous competitors fighting to get you, the consumer, to purchase their gas at the pumps. In order to compete, companies must spend money on marketing, which in turn affects the price you pay.
Inflation and Taxes
In 1950, gasoline cost roughly 30 cents per gallon, but today Americans are paying $2.10 per gallon on average. As the level of prices for goods and services rise, purchasing power decreases. Gasoline, like all products, is dramatically affected year over year by inflation.
Both the state and federal government tax every gallon of gas that leaves the pumps. The combined tax average is 48.23 cents per gallon on gasoline and 54.38 cents per gallon on diesel. These numbers might seem minuscule but it certainly adds up and affects the bottom line.
The costs associated with refining oil is rarely brought up when the age-long question of, “Why the heck am I paying so much for gas!?” arises. The reason may be because the refining process is a complicated practice that many Americans don’t know much about. The crude oil that is extracted from the ground is not of much use to us in its raw form. Rather the oil must be processed, separated, purified, and stored. Most folks might not understand the process, but they certainly feel the effects when they roll up to their local gas station.
Political sanctions have the potential to disrupt entire global crude oil supply networks. For this reason, speculators keep their ear to the ground, listening for the next geopolitical shakeup.
Weather & Location
Typically, mild weather equates to cheap gas prices. Why is that? Crude suppliers must deal with weather conditions just like the rest of us. During cold winters and hot summers they must spend an excess of funds on heat and air conditioning respectively. If you want to save a few cents at the pumps, keep your fingers crossed for mild weather.
You may have asked yourself, “Why is gas so darn expensive in my state?” Well, chances are if you’re asking that question you are located on one of the coasts. States along the Pacific and Atlantic Ocean historically pay more on average for their gasoline. The main reason behind this is simply distance from the source. The closer you are to USA produced crude oil, the more likely you are to find “discounted” prices. Suppliers will often sell their gas inexpensively to the local market if they do not have the demand or logistics in place to ship it elsewhere.
States with the Least Expensive Gas Prices
- New Mexico
- South Carolina
Notice, 9 of the 10 states listed are located in the interior part of the country, locations known for their crude oil supply and low tax rates on gasoline.
States with the Most Expensive Gas Prices
- New York
- Washington DC
Hawaii and Alaska, the last territories to gain statehood, experience the highest gas prices in the country. For Hawaii it’s a mixture of distance from the source and state taxes. Hawaiians pay the 4th highest gasoline tax in the country. On top of that, they’re over 2,000 miles from the continental United States, where a majority of the crude oil supply sits. Alaska on the other hand is one of the largest producers of crude oil but lacks the refineries and distribution necessary to experience savings at the pump.
Hopefully you’re one of the people lucky enough to live in a state with affordable gas, but sometimes cheaper gas just doesn’t cut it. You need some real savings.
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