What drives gas prices?
Look at it from
Explore this infographic to see which cost factors come into play at each step of the oil production process.
Geologists locate the crude oil, and the site is inspected and cleared for drilling. It’s then time to prepare the land, build the necessary facilities, assemble a crew, and get to work.
When the crude oil is out of the ground, it’s then loaded up and delivered to refineries, distribution centers and regional stockpiles. Depending on location and infrastructure, this oil may be transported by sea, by rail or by pipeline.
Businesses that buy large amounts of crude oil come to the futures exchange to avoid the risk of fluctuating prices. They lock in a price based on all the variables affecting supply and demand.
At some point the crude oil is refined--made into gasoline, diesel fuel, jet fuel and other products. Exchanges offer futures for crude oil in all its forms, including contracts for these refined products.
The gas station has now purchased and stocked the gasoline that you’ll put into your vehicle. The final price they charge per gallon takes into account local competition, state laws and profit margin for their business.
Gas prices are complex, but they don't have to be surprising.
Cost variables start at the beginning of the production process, and only build as the oil moves along the supply chain. By understanding all the factors at play, we can be better informed when we see our gas prices going up, and down, and up, and down...
U.S. restrictions on offshore drilling are negatively affecting supply by locking up an estimated 7.6 billion barrels of oil and 36.6 trillion cubic feet of natural gas.
Growth in newly industrialized countries is a key factor that drives physical oil prices. By 2020, China is expected to surpass the U.S. as the largest importer of crude oil.
Changing Supply Landscape
Advancements in technology have enabled supply and production of crude oil in North America to grow, while decreasing supplies of crude in the North Sea have resulted in a dramatic difference between the price of gasoline on the coasts, and the price in the Midwest.
Crude oil prices have surged in the past due to fears of potential supply disruptions related to elevated global tensions surrounding Iran's nuclear ambitions.
Rail and Pipeline Expansions
In North America, investments in pipeline expansions and increased rail capacity are making it more efficient and cost-effective to move domestic crude oil supplies to refineries on the Gulf and East coasts.
The OPEC (Organization of Petroleum Exporting Countries) controls most Middle East oil production and, when it restricts the transportation of supplies to certain regions, oil and gas prices increase—sometimes significantly.
Because oil is priced in U.S. dollars, it becomes more expensive as the dollar loses value. When the dollar is at a low, gasoline prices reach higher levels.
Governments cause fuel price increases in the form of taxes, subsidies and surcharges – ranging from 15 percent per gallon in parts of the U.S. to 60 percent in some European countries.
Logistics and infrastructure
The U.S. has recently lost five percent of its refining capacity as a result of rising foreign oil prices and U.S. gasoline demand being at a low. Recent advances in domestic infrastructure, however, are making up for these losses.
Certain types of crude oil may require more involved refining processes, and certain markets might have specific requirements for gasoline formulations. These factors, combined with a refinery’s capabilities and facilities, can impact pump prices.
State Taxes and Fees
In North America, each state has its own laws governing the purchase of gasoline for retail. Depending on where you live, these rates can cause gas prices to be higher or lower.
The gas station will use the money they make today to buy their next supply of gasoline. They set a price per gallon that will compete with other gas stations in town and will earn them a profit to keep business up and running.