Do you ever feel in the dark about what’s going on behind the scenes of fluctuating gas prices? We’re here to let you in on a few secrets, so you are in the know. Four core factors contribute to gas prices; the price of crude oil, taxes, marketing and distribution, and refining cost. What is your role in all of this?
The Price of Crude Oil
According to the EIA, about two-thirds or 70 percent of gas prices are determined by the cost of crude oil. Crude oil prices are largely determined by supply and demand, but other factors such as seasonality, inventory and the current financial market contribute. Supply focuses on the availability of crude oil, specifically the light/sweet crude which is harder to obtain and is in high demand. The price for this will naturally rise as it takes less time for refineries to process the light crude oil into gasoline. In general, if supply is limited, the price will increase.
Demand - this is where you come in! Changes in demand result from a fluctuation of people regularly using gas for transportation. The more people gas up, the higher the price may be. Countries like China and India are expanding the number of highways and expressways they have, resulting in more cars on the road, and increased demand for gas. Now, it’s important to note that in the long term, supply and demand will take more time to adjust, but small changes can have a significant impact on the short term prices.
Federal, state , and local taxes have the second most significant impact on the price of gas, next to the cost of crude oil. To give you a benchmark, federal tax is around 18 cents per gallon, CO state is roughly 28 cents, and local tax makes up about 4 cents per gallon. Combining federal and state taxes, you’re looking at 14 percent of the average price of gasoline. That adds up!
Marketing and Distribution
The marketing and distribution costs associated with gas and oil account for around 10 percent of the average price of gasoline. This includes several factors like the cost of operating the shop, local market conditions and the location of the dealer. It can also depend on if the retail outlet is an independent business that purchases gas from refiners for resale or a store that’s owned by refiners.
Refining costs can significantly differ between altering countries depending on the costs associated with each process. For example, the type of crude oil or technology used at the refinery can change the price of gas. Also, the ingredients used in the gas (ethanol) will factor into the cost.
Take Colorado, for example, the gas tax has been 22 cents per gallon for decades, but the Colorado Department of Transportation is proposing an increase in this tax to fund the state’s construction needs. Gas prices would need to increase 156 percent, which is likely to decrease demand as gas tax would be the highest in the nation. Keep in mind this would affect everybody differently depending on the type of car you drive.
While individual civilians don’t play a large part in the cost of gas, over time as consumption habits and market positioning change, we will see a fluctuation in prices. When you want to get the highest fuel efficiency out of your vehicle, turn to the highly trained auto mechanics at Mancinelli’s Auto Repair Center. We are located at 375 Logan Street, Denver, CO 80203. You can schedule an appointment online, or visit us. See you soon!