by Kevin Bonsor
Driving into the local service station, you notice that the gas prices have risen about a dime since you stopped there last week. But what can you do? -- you need gas! While dispensing gasoline into the fuel tank, you watch the pump display the $20 mark well before your tank is full. Gas prices have a major impact on our lives, affecting the economy and our daily activities.
Gasoline is the bloodline that keeps America moving. Our personal vehicles alone guzzle 115 billion gallons of gasoline and diesel fuel each year, according to the Motor & Equipment Manufacturers Association (MEMA). Add commercial vehicles, recreational vehicles and other machines that run on gasoline and the number is even more astronomical. In 2001, the average fuel economy of cars and light trucks hit their lowest points since 1980, which only compounds the problem of higher gas prices.
Gas prices have always been a sore spot for consumers. To the average person, it probably seems as though there's little rhyme or reason to how gas prices are determined. Over a period of a month, the cost of a gallon of gas can fluctuate by as much as 15 cents or more, as it did between April and May of 2001. In this edition of HowStuffWorks, we will take the mystery out of the gas pump by showing how gas prices are determined and exactly where your gas money goes.
Guzzling Gas in America
Americans have an insatiable thirst for gasoline, and with sport-utility vehicles (SUVs) growing in popularity we are only getting thirstier. Just look at the roads and highways and you'll see that a severe gas shortage would practically cripple the coun! try. Americans drive more than 2.6 trillion miles per year in automobiles, light trucks and SUVs, according to a MEMA report. That's equal to 14,000 round trips to the sun. Today, we drive almost twice as much as we did in 1980 (1.5 trillion miles), when gas prices were at their highest.
Historical Gas Prices*
1950 - $1.91 per gallon
1955 - $1.85
1960 - $1.79
1965 - $1.68
1970 - $1.59
1975 - $1.80
1980 - $2.59
1985 - $1.90
1990 - $1.51
1995 - $1.28
2001 - $1.66
*prices adjusted for inflation
Source: U.S. DOE
The United States consumed an average of 19.5 million barrels of oil per day (bbl/d) in 2000, according to the Department of Energy. Of that, 43 percent was used for motor gasoline. The rest was used for distillate fuel oil, jet fuel, residual fuel and other oils. Each barrel of oil contains 42! gallons (159 L), which yields 19 to 20 gallons (75 L) of gasoline. So, in the United States, something like 360 million gallons (1.36 billion L) of gasoline is consumed every day. When you consider that there are about 100 million households in the United States, this averages out to
about 3.6 gallons (13.6 L) per household per day.
Typically, the demand for gas spikes during the summer, when lots of people go on vacation. Holidays like Memorial Day and the Fourth of July create logjams of tourist traffic during the summer. This high demand usually translates into higher gasoline prices, although that's not always the case. For instance, while gas prices soared 31 cents in April and early May of 2001, reaching $1.71 per gallon, prices actually declined during the 2001 summer.
Price increases generally occur when the world crude-oil market
tightens and lowers inventories. We will discuss who controls the crude-oil marke! t later. Also, growing demand can sometimes outpace refinery capacity. In the spring, refineries perform maintenance, which can place a pinch on the gasoline market. By the end of May, refineries are usually back to full capacity.
Where Your Money Goes
When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all
of these entities have to get their slice of the pie.
Source: U.S. Department of Energy
Let's look at where your money goes when you pay for gas:
Crude! oil - The biggest portion of the cost of gas -- about 37 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices rose to as high as $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2000, and were at $28.05 per barrel as of August 13, 2001 (Source: U.S. DOE).
Refining costs - The refining of crude oil makes up about 20 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.
Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketi! ng the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for less than 10 percent of the price of gasoline.
Taxes - Taxes, including federal and local, account for about 27 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 19.96 cents per gallon. There may also be some additional state sales taxes, as well as local and city taxes. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, a gallon of gas in
England cost $4.71 in September 2000, with $3.40 going to taxes.
Station markup - In order to stay in business, service stations have to add on a few more cents to make a profit. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.
Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.
Regional Differences
In some regions of the country, gasoline is required to meet higher environmental standards in order to reduce the am! ount of smog created by burning gasoline. Producing this cleaner-burning gasoline can cause problems in refining, distribution and storage, which increases the cost of gas. "The result of this targeted approach to air quality has been to create gasoline market islands," John Cook, director of the petroleum
division of the DOE's Energy Information Administration, said before the U.S. House of Representatives Committee on Energy and Commerce on May 15, 2001.
Cook pointed at California and the Chicago and Milwaukee areas as primary examples of gasoline-market islands. The clean-burning requirements in each of these areas are unique to that individual area, and only a few refineries can produce the specialized products. High demand, a supply problem at a refinery or a problem with a pipeline can cause pricing in these areas to surge.
Global Gas Prices*
Most expensive per gallon:
(1 gallon=3.8 L)
Hong Kong: $5.38
London, England: $5.05
Oslo, Norway: $4.54
Seoul, South Korea: $4.52
Paris, France: $4.28
Least expensive per gallon:
Caracas, Venezuela: $0.40
Jakarta, Indonesia: $0.45
Kuwait City, Kuwait: $0.76
Manama, Bahrain: $0.82
Abu Dhabi, UAE: $0.92
*prices as of September 2000
Source: Runzheimer International
Driving into the local service station, you notice that the gas prices have risen about a dime since you stopped there last week. But what can you do? -- you need gas! While dispensing gasoline into the fuel tank, you watch the pump display the $20 mark well before your tank is full. Gas prices have a major impact on our lives, affecting the economy and our daily activities.
Gasoline is the bloodline that keeps America moving. Our personal vehicles alone guzzle 115 billion gallons of gasoline and diesel fuel each year, according to the Motor & Equipment Manufacturers Association (MEMA). Add commercial vehicles, recreational vehicles and other machines that run on gasoline and the number is even more astronomical. In 2001, the average fuel economy of cars and light trucks hit their lowest points since 1980, which only compounds the problem of higher gas prices.
Gas prices have always been a sore spot for consumers. To the average person, it probably seems as though there's little rhyme or reason to how gas prices are determined. Over a period of a month, the cost of a gallon of gas can fluctuate by as much as 15 cents or more, as it did between April and May of 2001. In this edition of HowStuffWorks, we will take the mystery out of the gas pump by showing how gas prices are determined and exactly where your gas money goes.
Guzzling Gas in America
Americans have an insatiable thirst for gasoline, and with sport-utility vehicles (SUVs) growing in popularity we are only getting thirstier. Just look at the roads and highways and you'll see that a severe gas shortage would practically cripple the coun! try. Americans drive more than 2.6 trillion miles per year in automobiles, light trucks and SUVs, according to a MEMA report. That's equal to 14,000 round trips to the sun. Today, we drive almost twice as much as we did in 1980 (1.5 trillion miles), when gas prices were at their highest.
Historical Gas Prices*
1950 - $1.91 per gallon
1955 - $1.85
1960 - $1.79
1965 - $1.68
1970 - $1.59
1975 - $1.80
1980 - $2.59
1985 - $1.90
1990 - $1.51
1995 - $1.28
2001 - $1.66
*prices adjusted for inflation
Source: U.S. DOE
The United States consumed an average of 19.5 million barrels of oil per day (bbl/d) in 2000, according to the Department of Energy. Of that, 43 percent was used for motor gasoline. The rest was used for distillate fuel oil, jet fuel, residual fuel and other oils. Each barrel of oil contains 42! gallons (159 L), which yields 19 to 20 gallons (75 L) of gasoline. So, in the United States, something like 360 million gallons (1.36 billion L) of gasoline is consumed every day. When you consider that there are about 100 million households in the United States, this averages out to
about 3.6 gallons (13.6 L) per household per day.
Typically, the demand for gas spikes during the summer, when lots of people go on vacation. Holidays like Memorial Day and the Fourth of July create logjams of tourist traffic during the summer. This high demand usually translates into higher gasoline prices, although that's not always the case. For instance, while gas prices soared 31 cents in April and early May of 2001, reaching $1.71 per gallon, prices actually declined during the 2001 summer.
Price increases generally occur when the world crude-oil market
tightens and lowers inventories. We will discuss who controls the crude-oil marke! t later. Also, growing demand can sometimes outpace refinery capacity. In the spring, refineries perform maintenance, which can place a pinch on the gasoline market. By the end of May, refineries are usually back to full capacity.
Where Your Money Goes
When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all
of these entities have to get their slice of the pie.
Source: U.S. Department of Energy
Let's look at where your money goes when you pay for gas:
Crude! oil - The biggest portion of the cost of gas -- about 37 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices rose to as high as $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2000, and were at $28.05 per barrel as of August 13, 2001 (Source: U.S. DOE).
Refining costs - The refining of crude oil makes up about 20 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.
Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketi! ng the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for less than 10 percent of the price of gasoline.
Taxes - Taxes, including federal and local, account for about 27 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 19.96 cents per gallon. There may also be some additional state sales taxes, as well as local and city taxes. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, a gallon of gas in
England cost $4.71 in September 2000, with $3.40 going to taxes.
Station markup - In order to stay in business, service stations have to add on a few more cents to make a profit. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.
Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.
Regional Differences
In some regions of the country, gasoline is required to meet higher environmental standards in order to reduce the am! ount of smog created by burning gasoline. Producing this cleaner-burning gasoline can cause problems in refining, distribution and storage, which increases the cost of gas. "The result of this targeted approach to air quality has been to create gasoline market islands," John Cook, director of the petroleum
division of the DOE's Energy Information Administration, said before the U.S. House of Representatives Committee on Energy and Commerce on May 15, 2001.
Cook pointed at California and the Chicago and Milwaukee areas as primary examples of gasoline-market islands. The clean-burning requirements in each of these areas are unique to that individual area, and only a few refineries can produce the specialized products. High demand, a supply problem at a refinery or a problem with a pipeline can cause pricing in these areas to surge.
Global Gas Prices*
Most expensive per gallon:
(1 gallon=3.8 L)
Hong Kong: $5.38
London, England: $5.05
Oslo, Norway: $4.54
Seoul, South Korea: $4.52
Paris, France: $4.28
Least expensive per gallon:
Caracas, Venezuela: $0.40
Jakarta, Indonesia: $0.45
Kuwait City, Kuwait: $0.76
Manama, Bahrain: $0.82
Abu Dhabi, UAE: $0.92
*prices as of September 2000
Source: Runzheimer International
