Gasoline is sold and priced by grade
Gasoline is sold based on octane levels in three primary grades of gasoline:
The octane level of a fuel refers to its resistance to combustion. A fuel with a higher octane level is less prone to pre-ignition and detonation, also known as engine knocking. Refiners charge more for higher octane fuel, and premium grade gasoline is the most expensive. From 1995 through 2006, the price difference between grades of gasoline was typically about 10¢ per gallon. Since 2006, the price difference between gasoline grades has increased. In 2016, the national average price of midgrade gasoline was about 25¢ per gallon more than regular gasoline. Premium gasoline was about 22¢ per gallon more than the price of midgrade gasoline and about 47¢ per gallon more than regular grade.
What are the main components of the retail price of gasoline?
The retail price of gasoline includes four main components:
- The cost of crude oil
- Refining costs and profits
- Distribution and marketing costs and profits
Retail pump prices reflect these components and the profits (and sometimes losses) of refiners, marketers, distributors, and retail station owners.
What determines the cost of crude oil?
The cost of crude oil is the largest factor in the retail price of gasoline. The cost of crude oil as a share of the retail gasoline price varies over time and across regions of the country. Crude oil prices are determined by both demand and supply. World economic growth is the most significant factor for demand. Oil prices often increase in response to disruptions in the international and domestic supply of crude oil. The Organization of the Petroleum Exporting Countries (OPEC) sometimes exerts significant influence on oil prices by setting an upper production limit on its members. OPEC produced about 44% of the world's crude oil from 2000 to 2016. OPEC countries maintain nearly all of the world's spare oil production capacity and possess almost three-fourths of the world's estimated proved crude oil reserves. Increases in U.S. oil production in the past several years have helped reduce upward pressure on oil and gasoline prices.
Taxes add to the price of gasoline
Federal, state, and local government taxes also contribute to the retail price of gasoline. The federal excise tax is 18.30¢ per gallon and the federal Leaking Underground Storage Tank fee is 0.1¢ per gallon. As of January 1, 2017, state taxes and fees on gasoline averaged 27.30¢ per gallon. Sales taxes along with taxes applied by local and municipal governments can have a significant impact on the price of gasoline in some locations.
Refining costs and profits
Refining costs and profits vary seasonally and by region in the United States, partly because of the different gasoline formulations required to reduce air pollution in different parts of the country. The characteristics of the gasoline produced depend on the type of crude oil that is used and the type of processing technology available at the refinery where it is produced. Gasoline prices are also affected by the cost of other ingredients that may be blended into the gasoline, such as ethanol. Increased demand for gasoline in the summer generally results in higher prices.
Distribution and marketing
Distribution, marketing, and retail dealer costs and profits are also included in the retail price of gasoline. Most gasoline is shipped from refineries by pipeline to terminals near consuming areas, where it may be blended with other products (such as ethanol) to meet local government and market specifications. Gasoline is delivered by tanker truck to individual gasoline stations.
Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase gasoline from refiners and marketers for resale to the public. The price at the pump also reflects local market conditions and factors, such as the desirability of the location and the marketing strategy of the owner.
The cost of doing business by individual dealers can vary greatly depending on where the dealer is located. These costs include wages and salaries, benefits, equipment, lease or rent payments, insurance, overhead, and state and local fees. Even retail stations next to each other can have different traffic patterns, rent, and sources of supply that affect their prices. The number and location of local competitors can also affect prices.