If you have recently been at the gas station to fuel your car, you most likely have been considering riding your bike instead. Every time you want to fuel your car, you seem to be digging a little deeper into your pockets, which has been continuously happening since the beginning of 2021. With the current rising trend of gas prices, Americans are afraid that the price will go as high as in 2008, when the cost per gallon was $4.11. With so many factors at play, you must be wondering why gas prices are rising, so let’s enlighten you.
1. Price of Crude Oil
According to Forbes, the primary factor influencing gasoline prices is usually the underlying oil prices changes. By June 2021, 55% of the total gas price was the crude oil cost, while the other factors followed. Crude oil changes have been determining at least half the price of each gallon of gas for the last ten years.
Gas Prices Explained informs us that while crude oil adds between $1.19 and $1.67 per gallon, excise taxes add 49 cents per gallon. State, local, and federal taxes all contribute to the retail gasoline price. As per some sources, in January 2021, total state taxes and fees were 30.06 cents per gallon on average. Other taxes such as sales and any other applied by local and municipal governments also drive the gasoline prices upwards in some areas.
3. Distribution and Marketing Costs
For every dollar you spend on gas, 8 cents goes towards distribution and marketing. Once crude oil is taken to refineries, then the gasoline is transported from the refineries to distribution centers and finally to the gas stations. The transportation cost is passed on to the consumer, and so is the cost of marketing the oil company brand.
4. Location of the Gas Station
According to How Stuff Works, the distance of the gas station from the oil refineries affects the gas price. The longer the distance, the higher the price due to the transportation costs involved and vice versa. Therefore, you will notice that gas stations around the Gulf of Mexico will sell at lower prices because most refineries are there.
5. Refining Costs
The cost of refining crude oil will vary depending on the season and region within the United States. The crude oil refined will determine the gasoline produced and the technologies available for processing at the refineries. According to Yahoo Finance, gasoline is likely to evaporate during summer and increase the smog. Therefore the US government requires citizens to help lower emissions by using cleaner-burning fuel. Refiners are faced with the extra cost of producing gasoline blends that will not evaporate, which increases production costs. Gasoline ends up costing up to 15 cents more per gallon.
6. Commodities Traders
Sometimes the forces of supply and demand are not entirely to blame for the rising gas prices. The oil futures market plays a part, too; an oil futures contract is an agreement giving you the right to buy a barrel at a specific price at a certain date in the future. The buyer and seller must honor the deal on that specified date. The Balance explains that the fluctuating prices in the futures contracts affect both crude oil and gasoline prices. If they anticipate that oil prices will be higher, they will bid them higher, and the consumer pays for it.
A gas station is in business to make profits, and after taking into account the marketing, distribution, and other factors, they still have to make enough money to cover their costs. Remember that some stations need to pay their lease, rent, employee wages, salaries, and maintenance of the pumps. Therefore depending on the costs incurred by a station, you might find that two stations within the same location are charging different prices, probably by a few cents. Even if there is no set rule for how much a gas station can add to the gas price, some states have mark-up laws. Such laws are implemented to protect small gas stations from being forced out of business by larger ones.
8. High Demand, Low Supply
The pandemic resulted in five refineries permanently shutting down as businesses closed and people started working from home. Gasoline consumption fell by 13% as refining capacity reduced by 4.5 % in 2020. With the COVID-19 restrictions easing up, businesses are back to operating, and employees are returning to work. The increase in demand is driving gasoline prices up because the supply is still low, owing to the permanently shut down refineries.
9. Less Competition
The truth about competition is that it benefits the consumer in so many ways; not only do we get quality goods and services, but the price is usually lower as sellers try to attract more customers. However, the petroleum industry has increasingly been taking part in mergers and acquisitions, which results in reduced competition. The Federal Trade Commission (FTC) understands the impact of mergers and blocks some of the proposed mergers but those that are successful affect gas prices. Once competing companies merge, they gain a higher market share in the industry and control the prices. Usually, they review the prices upwards.
10. Dollar Depreciation
The US dollar has depreciated compared to other major currencies by between 10% and 15% in the last year. As of May 2021, the US dollar was cheaper than other major currencies in the foreign buyer markets, so you will now pay less in Euros to get a dollar. Oil is priced in US dollars in the petroleum industry, and once the dollar weakens, the other foreign currencies are stronger. Essentially foreign countries can buy more oil for the same amount of money because it is cheaper. The more foreigners buy the oil, the higher the demand, which drives up the oil price in dollars, consequently the gasoline prices.