What drives gasoline prices?
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Across the U.S., the cost of natural gas has been a hot topic of late as prices hit record highs.
The national average is now at $5.00 per gallonby the end of summer, this number may grow to $6 per gallonaccording to estimates by JPMorgan.
But before we understand what’s happening at the gas station, it’s important to first understand the key factors that affect gasoline prices.
This graph uses data from the U.S. Energy Information Administration (EIA), outlining the main components that affect gasoline prices, providing the proportional effect of each factor on the price.
four main factors
According to the EIA, there are four main factors that affect the price of natural gas:
- Crude Oil Prices (54%)
- Refining costs (14%)
- Tax (16%)
- Distribution and Marketing Costs (16%)
More than half of fueling costs are affected by crude oil prices. Meanwhile, the rest of the pump’s price is split evenly between refining costs, marketing and distribution, and taxes.
Let’s take a deeper look at each factor.
Crude oil prices
The most influential factor is the cost of crude oil, which is largely determined by international supply and demand.
Although the United States is the world’s largest oil producer, it is still a net importer Crude oil, most of which comes from Canada, Mexico and Saudi Arabia. U.S. natural gas prices are largely influenced by global crude oil markets due to the U.S. reliance on imports.
Many geopolitical factors can affect crude oil markets, but one of the most influential is the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia.
OPEC was formed in 1960 to counter the US dominance of the global oil market. OPEC sets production targets for its 13 members, and historically, oil prices have been tied to changes in OPEC production. Today, OPEC countries are responsible for about 60 percent of international oil trade.
Oil needs to be refined into gasoline before it can be used by consumers, which is why the cost of refining is factored into the price of natural gas.
The United States has hundreds of refineries across the country.The country’s largest refinery, owned by a Saudi Arabian company Saudi Aramcoprocess around 607,000 Several barrels of oil per day.
The exact cost of refining will vary, depending on many factors such as Crude oil type Process technologies used, available to refineries, and gasoline requirements for specific regions of the country.
Overall, U.S. refining capacity has not kept pace with oil demand. Several refineries were closed throughout the pandemic, but even before COVID-19, U.S. refining capacity was lagging demand.Incredibly, the country has yet to build any brand new refining facilities since 1977.
In the United States, taxes also play a key role in setting the price of natural gas.
In the U.S., the average gasoline tax is $0.57 per gallon, however, the exact amount varies by state. Here are the five states with the highest gasoline taxes:
|rank||state||Gas Tax (per gallon)|
*Note: Figures include state and federal taxes
States with high gasoline taxes often spend the extra money on improving infrastructure or local transportation.For example, Illinois double It imposed a gasoline tax in 2019 as part of a $45 billion infrastructure plan.
California, the state with the highest natural gas tax, is expected to raise the tax rate in July, which will push the price of natural gas up by about 50%. three cents per gallon.
distribution and marketing costs
Finally, distribution and marketing costs have an impact on natural gas prices.
Gasoline is usually shipped from the refinery to the local terminal by pipeline. From there, gasoline is further processed to ensure it meets market requirements or local government standards.
The gas station then distributes the final product to consumers. The cost of operating a gas station varies – some are owned and operated by branded refineries such as Chevron, while others are owned and operated by independent merchants.
Big brands run a lot of ads.According to Morning Consult, Chevron, BP, Exxon Mobil and Royal Dutch Shell have aired more than 44,495 times Between June 1, 2020 and August 31, 2021.
How will the Russia-Ukraine conflict affect U.S. natural gas prices?
if a small part U.S. oil comes from Russia. Why does the Russia-Ukraine conflict affect U.S. oil prices?
Because oil is bought and sold in global commodity markets. So when countries imposed sanctions on Russian oil, global supplies were squeezed, ultimately pushing up prices.
Unless the U.S. slips into a recession, this supply shock could keep prices high for some time, which is increasingly likely based on recent data trends.