What Factors Determine Gas Prices?
If you’ve noticed prices move up and down at the gas station, you may have wondered what causes gas prices to fluctuate. Or, maybe you’ve noticed higher or lower gas prices in other states during a road trip. From location to tax rates, here’s a look at some of the factors that may affect the price of gas.
Price of Crude Oil
The biggest contributor to the price of gas is the cost of crude oil, says the U.S. Energy Information Administration (EIA). Also known as fossil fuel, crude oil is the liquid that is removed from the ground and sent to refineries to be made into gasoline.
Crude oil prices are based largely upon supply and demand. Therefore, when crude oil production rises, prices may decline, but costs may rise when production declines. Economic conditions play a role in crude oil prices, the EIA says. When the economy is doing well, demand for raw materials such as crude oil tends to rise, while prices fall.
State and federal taxes are built into the price of a gallon of gas, says Energy.gov. While the same federal tax rate is charged at every gas station in the U.S., each state sets its own tax rates. Some states charge sales tax, while others may include other costs, such as environmental fees, in the price of a gallon of gas.
State tax rates aren’t the only reason why gas prices can vary by location. Gas prices can vary based on state or region due to the distance from the supply, according to the EIA. Supply sources can include the pipeline and refineries. So, for example, say the source of the gasoline is near the Gulf Coast. States in that region may see lower prices at the pump because they are closer to the source of the gasoline than states along the West Coast or in New England.
In addition, some states have adopted laws that require the use of “cleaner” fuel that has less of an environmental impact. This fuel typically costs more to produce and is offered by limited suppliers, making it more expensive for drivers to purchase, the EIA explains.
Retail competition may also affect gas prices, even within the same town. Gas station owners may adjust their prices based on how many competitors are nearby, says the EIA.
Gas station owners may also consider their operating costs, like employee wages and rent payments, when setting their prices, the EIA says. Other expenses, such as fuel distribution, marketing and refining, also play roles in the price of gas.
While you can’t control the price of gas, the next time you fill up, you may have a better understanding of some of the factors that contribute to the price you pay at the pump.