Top Factors that Influence National & International Gas Prices
If you’re anything like me, you’ve been watching the price of gas fluctuate from state to state, from week to week, even from day to day and you’ve been wondering what on earth is behind the seemingly inconsistent rise and fall of gas prices? The most recent example that left me slack-jawed in amazement and confusion was over Memorial Day weekend, when I traveled from one coast to the other to visit family. Upon passing a pump on the way home from the airport, I was shocked to see that there was about a 45-cent difference in the price of gasoline at the East Coast pump from the gas stations where I currently live on the West Coast. My car holds just over 14 gallons of gas. After doing some quick mathematical calculations, I realized that I would save $6.30 every time I filled up at the East Coast pump, coming out to $27 a month, and a whopping $325 a year.
This most recent discovery has prompted some serious research on my part about what factors are behind the wildly fluctuating price of gas, which I am happy to share with you today. Read on to see the worldwide factors contribute to the cost of gasoline, and then a further breakdown of why the cost fluctuates from state-to-state in our own country.
Supply and Demand
Crude oil is the main ingredient found in gasoline. The price of crude oil rises and falls according to a little system known as “supply and demand.” As more oil is manufactured, produced, and distributed, the price per gallon decreases. Conversely, the cost will rise as the amount of oil produced lowers. So as we see up-and-coming countries and countries with billion plus populations of people develop a need for more gasoline for the increase of automobile drivers, this fluctuation of supply and demand has an affect on the entire world. Other factors that affect the worldwide supply and demand are natural disasters and political strife in the foreign countries that produce vast amounts of crude oil.
Organization of the Petroleum Exporting Countries
Otherwise known as OPEC, this intergovernmental organization has some significant say over how much oil should be manufactured and then sold to other countries. OPEC doesn’t have quite as much power as it did 30 and 40 years ago, due to events such as oil reserves popping up in other areas such as Alaska, Canada, and the Gulf of Mexico. As of 2010, OPEC members held 79% of world crude oil reserves, so as you can see they still do control to a great degree the global market for crude oil. OPEC’s recent decisions have based on the decline in the U.S. dollar, global politics, and speculation about what the economy will do in the coming months and years.
Expense of Producing Gasoline
The U.S. Congress provides a breakdown of gas per gallon at the pump, which looks like this: approximately 20% goes to the cost of refining the gasoline from crude oil, 10% goes toward the cost of advertising and distribution, roughly 20% is the actual tax on the gasoline (which varies from state to state and from country to country,) and the biggest chunk, about 50% of the price, is the actual cost of the crude oil itself. So as you can see, a lot of factors go into determining the price that you pay at the pump, and the largest percentage of the cost is the process of extracting the crude oil, then refining it into everyday gasoline. Transportation, labor, time of year, weather, and location are all factors that effect the cost of producing gasoline from crude oil.
State-to-State in the U.S.
You all read about my run-in with the recent wildly different gas prices from coast to coast above, but here is further proof that prices at the pump can be radically different by state. As of March 2012, the price of gas in Illinois was 70 cents higher than the price per gallon in Wyoming, and the price per gallon was 86 cents more in California than in Wyoming. We’ve seen gas prices fluctuate according to the seasons based on the times of the year that more consumers are driving, like during the summer and around holidays where travel is heavy. Gas prices tend to go up during these times as part of the “supply and demand” factor. But there are three main reasons that the price at pumps is varied across the U.S. Here they are:
1. Gasoline Requirements
Different states have different requirements for the quality of fuel that can be bought and distributed, such as oxygenated fuel and fuel with some percentage of ethanol. To give you an example, in the state of California the quality of fuel is required to be higher so as to limit the amount of air pollution in the state’s already smoggy airs. Other states have imposed similar statutes on the composition of gasoline based on ecological standards. In states that are fairly lenient with their requirements, gas prices will be lower and in stricter states they’ll be higher.
2. Tax Difference
The percentage of tax at the pump varies from state to state, so naturally this is another factor that goes into the difference of gas prices. There are currently 17 states within the U.S. whose state taxes cause the price of tax per gallon to be above 48.8 cents, versus 15 states who pay less than 40 cents per gallon. This is another reason that the examples I listed above are what they are—Illinois tax is 25 cents higher per gallon than Wyoming, so it is understandable that the cost to the consumer would be higher year-round as well.
3. Cost of Transportation
Naturally the placement of things like oil pipelines, gasoline pipelines, and product pipelines will affect the cost of gasoline in any given area. Obviously the closer a gas station is to a pipeline, the less cost is incurred to transport the gasoline to that location. Generally speaking, Americans who live on either of the coasts tend to pay less at the pump due to their proximity to the location of the crude oil supply, while folks living in the middle of the country usually pay more.
In closing, I wanted to provide you with a few recommendations to help you find the most inexpensive gasoline in your area, wherever you happen to live within the country. After all, we all have more important things to worry about than going broke at the gas pumps—there’s debt to pay, our personal credit score to improve, and fun activities like vacations to save up for this summer. I’d rather invest my money on any of those things than spend a penny more than I need to at the pump! Gasbuddy.com is an incredibly helpful website that can help you track down the cheapest gas in your area. The mobile app can be downloaded and will use your phone’s GPS to locate inexpensive prices, wherever you are. Mapquest has also developed a Gas Prices function hailed to find the lowest gas prices near you, if you plug in an address or intersection.
Financial blogger DK loves to write about all things related to personal finance as well the national and international economy. You can read more of his work at RoadFish.com.