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There are Many Reasons Why Gas Prices Fluctuate

The recent surge in gas prices has hit the American public during a perfect storm of crises. Alongside Russia’s invasion of Ukraine is a global pandemic still lingering over our heads, and on top of that we’re experiencing some of the highest inflation levels in many years. Any of these individually - or all these together - seem to be the consensus for blame among the public.

Americans everywhere are feeling the sting, which comes as the pain of rising prices as much as 10 percent from week-to-week, according to The New York Times. In a recent article, they also said, the public’s perception is an increasingly dark one, according to the drivers interviewed. They said the higher prices had already caused them to cut back on expenses and small pleasures like going out to eat.

Gasoline accounts for only a small share of consumers’ overall spending, but because gas prices are so visible — posted in giant numbers alongside every highway in the country — they have a pretty sizable influence on people’s perception of inflation and the economy.

Michael Feroli, chief U.S. economist at J.P. Morgan, said he expected consumer spending to slow over the next few months as Americans pay more to fill up their tanks. However, “the long-term impact should be somewhat minimal,” Feroli noted.

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So, what exactly factors into the ups and downs of gas prices? The retail price of gasoline generally includes four main components:

The Cost of Crude Oil: 53.6%

The price of oil is a crude reality. Crude oil is the raw commodity used to make gasoline, so crude oil prices play the most important role in setting gasoline prices.

The cost of crude oil is the largest component of the retail price of gasoline. It comes as no surprise that it varies over time and across regions of the country.

Taxes: 16.4%

Federal, state, and local government taxes contribute to the retail price of gasoline. The federal tax on motor gasoline is 18.40 cents per gallon and as of January 1, 2022, total state taxes and fees on gasoline averaged 31.02 cents per gallon.

Sales taxes along with taxes applied by local and municipal governments can have a significant impact on the price of gasoline as well – depending on location.

Refining Costs & Profits: 14.4%

Refining has a price. Crude oil cannot be put into a gas tank (unless you’d like to be towed directly to a repair shop). Therefore, it must go through a process done only by refiners who distill crude oil into gasoline and mix in the required additives.

Refining costs and profits vary seasonally and by region as well. It’s common for gas prices to rise in the summer as demand usually increases due to travel and weather. Furthermore, different gasoline formulations are required to reduce air pollution in different parts of the country.

Refining and making gasoline also depends on the type of crude oil that is used and the type of processing technology available at each refinery along with the cost of every other ingredient mixed in.

Distribution & Marketing: 15.6%

Once crude is refined into gasoline, the fuel must be shipped to a storage tank, and eventually distributed to local gas stations. Those stations require staff and maintenance.

The price at the pump also reflects local market conditions and factors, such as the fueling location and the marketing strategy of the owner. In conclusion and simplified terms, here are the major takeaways to remember:

  • Gas prices are so noticeable their rise often sparks arguments about who is to blame.
  • Gasoline prices are determined largely by the laws of supply and demand.
  • Because consumers are slow to respond to changes in gasoline prices, they can move rapidly to balance supply and demand.
  • They always cover the cost of acquiring and refining crude oil as well as distributing and marketing the gasoline, in addition to state and federal taxes.

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