Tuesday, June 21, 2011

June Clean Cities Question of the Month

Question of the Month: What are the factors that determine the price of gasoline?

Answer: Gasoline price increases tend to emphasize the need for increased fuel supply or reduced fuel demand through the use of fuel-efficient vehicles, alternative fuels and other strategies that reduce petroleum consumption. The final price of gasoline is a product of many factors that can be complicated and constantly changing, but it comes down to the concept of supply and demand.

Currently, the average price of regular gasoline in the United states, including all taxes, is$3.78/gallon, as compared to $2.40/gallon in October 2010. According to the U.S. Energy Information Administration (EIA, http://www.eia.gov/oog/info/gdu/gasdiesel.asp), the current cost of gasoline can be broken down into the following components:

Crude oil price (as purchased by refiners): 69%
Refining costs and profits: 16%
Taxes (federal and state): 10%
Distribution and marketing costs and profits: 5%

Of these components, changes in the cost of crude oil have the greatest impact on gasoline prices. As crude oil prices increase, they become a larger percentage of the overall cost of gasoline at the pump. Between 2000 and 2008, the average retail price of gasoline was $2.06/gallon and crude oil prices only made up 51% of the overall price, as compared to the breakdown above.

Crude oil prices are affected by economic, environmental and political factors. As with most finite resources, the economics of oil are driven by supply and demand. Oil suppliers price their products based on actual and expected demand for petroleum products relative to current and projected short- and long-term supply of oil. When supply is low and/or demand is high, gasoline prices tend to increase. When supply is high and/or demand is low, gasoline prices tend to decrease.

The demand for petroleum products is largely determined by the world economy. For instance, after the gasoline price spike in 2008, the economic situation led to a decline in global petroleum consumption and, therefore, a decrease in gasoline prices. Conversely, the recent rise in gasoline prices can be tied, in part, to the gradual improvement in the economy.

The global oil supply tends to be more difficult to predict. Environmental factors, such as weather events, can affect the supply of oil. For instance, hurricanes in the Gulf of Mexico in the mid-2000s (e.g., Hurricane Katrina in 2005) shut down U.S. crude oil production and negative affected refinery and pipeline operations, causing several spikes in oil and gasoline prices. In addition, global supply of oil can be affected by geopolitical issues. For example, the recent rise in gasoline prices can be partially attributed to political events outside out borders.

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