Gasoline Prices Explained (2024)

Before you can have an understanding of what’s happening at the pump, it’s important to first know what key factors influence gasoline prices.

Some Main Factors That Influence Prices

There are four main factors that influence the price of gas:

More than half the cost of filling your tank is influenced by the price of crude oil. Meanwhile, the rest of the price at the pump is split fairly equally between refining costs, marketing and distribution, and taxes.

Crude Oil Prices

The most influential factor is the cost of crude oil, which is largely dictated by international supply and demand.

Despite being the world’s largest oil producer, the U.S. remains anet importerof crude oil, with the majority coming from Canada, Mexico, and Saudi Arabia. Because of America’s reliance on imports, U.S. gas prices are largely influenced by the global crude oil market.

A number of geopolitical factors can influence the crude oil market, but one of the biggest influences is the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia.

Established in 1960, OPEC sets production targets for its 13 member countries, and historically, oil prices have been linked to changes in OPEC production. Today, OPEC countries are responsible for about 60% of internationally traded petroleum.

Refining Costs

Oil needs to be refined into gasoline before it can be used by consumers, which is why refining costs are factored into the price of gas.

The U.S. has hundreds of refineries across the country. The country’s largest refinery, owned by the Saudi Arabian company​​Saudi Aramco, processes around607,000barrels of oil per day.

The exact cost of refining varies, depending on a number of factors such as thetype of crude oilused, the processing technology available at the refinery, and the gasoline requirements in specific parts of the country.

In general, refining capacity in the U.S. has not been keeping up with oil demand. Several refineries shut down throughout the pandemic, but even before COVID-19, refining capacity in the U.S. was lagging behind demand. Incredibly, there haven’t been any brand-new refining facilities built in the countrysince 1977.

Taxes

In the United States taxes also play a critical role in determining the price of gas. Across America, the average gasoline tax is approximately$0.57 per gallon, however, the exact amount fluctuates from state to state.

Why Do Gasoline Prices Fluctuate?

Retail gasoline prices are mainly affected bycrude oil pricesand the amount of gasoline available to meet demand. Strong and increasing demand for gasoline and other petroleum products in the United States and the rest of the world can place intense pressure on available supplies.

Gasoline prices tend to increase when the available gasoline supply decreases relative to real or expected gasoline demand or consumption. Gasoline prices can change rapidly if something disrupts crude oil supplies, refinery operations, or gasoline pipeline deliveries. Even when crude oil prices are stable, gasoline prices fluctuate because of seasonal changes in demand and in gasoline specifications.

Seasonal demand and specifications for gasoline also affect prices

Historically, retail gasoline prices tend to gradually rise in the spring and peak in late summer when people drive more frequently. Gasoline prices are generally lower in winter months. Gasoline specifications and formulations also change seasonally. Environmental regulations require that gasoline sold in the summer be less prone to evaporate during warm weather. This requirement means that refiners must replace cheaper but more evaporative gasoline components with less evaporative but more expensive components. In 2000 through 2022, the average monthly price of U.S. retail regular-grade gasoline in August was about 39 cents per gallon higher than the average price in January.

Gasoline inventories can help to moderate price increases

The supply of gasoline is largely driven by crude oil supply and refining, gasoline imports, and gasoline inventories (stocks). Stocks are the cushion between major short-term supply and demand imbalances, and stock levels can have a significant impact on gasoline prices.

If refinery or pipeline problems or low imports cause unexpected declines in supply, gasoline inventories may drop rapidly. This drop in inventories may cause wholesalers to bid higher for available supply over their concern that future supplies may not be adequate.

Imbalances may also occur when a region changes from one gasoline formulation to another, and refiners, distributors, and marketers adjust supply for the new product.

Why Do Gasoline Prices Differ Regionally?

Gasoline prices vary over time and among states and regions. In addition to differences in state and local taxes, other factors contribute to regional differences in gasoline prices, including distance from supply, supply disruptions, and retail competition and operating costs.

Distance From Supply Usually Means Higher Prices

Retail gasoline prices tend to be higher the farther the gasoline must be transported to the point of sale because transportation costs increase when that distance increases. Supply sources include refineries, ports, and pipeline and blending terminals.

Supply Disruptions Can Cause Price Increases

Events that slow or stop gasoline production can result in increased bidding for available gasoline supplies. Pipeline disruptions, planned or unplanned refinery maintenance, or refinery shutdowns—such as those that occur when hurricanes hit the United States—may cause gasoline prices to rise. If the gasoline transportation system cannot provide surplus supplies from one region to another, prices will remain relatively high.

Retail Competition and Operating Costs Play a Role in Pump Prices

Prices at gasoline stations are often highest in locations with fewer gasoline stations. Even stations located close together may have different traffic patterns, rent, and sources of supply that influence pricing.

Environmental Programs Add to the Cost of Production, Storage, and Distribution

Some areas of the country are required to use special, reformulated gasoline that includes additives to help reduce carbon monoxide, smog, and toxic air pollutants from evaporating and burning gasoline. About one-third of the gasoline sold in the United States is reformulated. Other environmental programs have restrictions on fuel transportation and storage. These programs tend to add to the cost of producing, storing, and distributing gasoline.

Why are Gasoline Prices in California More Variable Than Prices in Other States?

California gasoline prices are generally higher and more variable than prices in other states because relatively few refineries produce California's unique blend of gasoline. California's reformulated gasoline program is more stringent than the federal government's program. California's tax on gasoline is also higher than most states' gasoline tax.

California refineries need to run at near full capacity to meet the state's gasoline demand. If more than one of its refineries experiences operating problems at the same time, California's gasoline prices can increase substantially. Even when supplies are available from other West Coast refineries, U.S. Gulf Coast refineries, or from foreign refineries, they can take a relatively long time to arrive in California.