Everyone loves to discuss the ‘price at the pump’ when it comes to gasoline and diesel. After all, between fueling personal vehicles and the vehicles required to conduct business, this price can have a significant impact on the cost of products and services regardless of industry. But what determines the price of gasoline and diesel? Econ 101 taught us that the market’s interaction of supply and demand determines commodity prices. But what actually affects the price at the pump?

Primary Factors Affecting Gas Prices

Four main factors determine the price of fuel: crude oil prices, the cost of refining, distribution & marketing, and taxes. The supply of crude oil is by far the most significant variable, comprising over 40% of the costs for diesel and over 50% of gasoline{1}. The Organization of Petroleum Exporting Countries, better known as OPEC, has tremendous influence over the global supply of oil. This is because OPEC controls about 80% of the world’s oil reserves{2]. However, as recent events show, other non-OPEC producers like Russia can affect the supply.

Refining

Refining is the process that converts crude oil into gasoline, diesel, and other oil derivatives. This determines roughly 20% – 25% of the price of gasoline. Refining costs will vary depending on the product, e.g., low-sulfur highway diesel, ethanol-blended summer formulations, additives, etc. Distribution and marketing (10% – 20%) involve transporting the finished products from the refineries to the regional and local distribution points throughout the country via pipelines, railcars, and trucks. Taxes make up the remaining 12% to 14%.

Conclusion

In conclusion, the price at the pump, or how much you pay to fill up your car or truck, is determined primarily by the global supply and demand for crude oil. However, how far away you are from a refinery and the state you live in (Pennsylvania has the highest gas tax at $0.57/gallon, Alaska has the lowest at $0.08/gallon){3} will also have a significant impact.

SOURCES:

1 – https://www.eia.gov/petroleum/gasdiesel/
2 – https://www.opec.org/opec_web/en/data_graphs/330.htm
3 – https://www.forbes.com/sites/dereksaul/2022/06/22/these-states-have-the-highest-and-lowest-gas-taxes-as-biden-pushes-tax-holiday/?sh=7dec0d5b2e06