Gas For Less Money

Why are gas prices so high? There’s no one single answer. To understand why the prices are so high, we first must understand what makes up the price we pay at the pump. Below is an illustration that breaks down the price:

Crude oil is the biggest component in the price of gas. It now accounts for approximately  73% of the gasoline pump price. World oil prices are at record highs due largely to high worldwide oil demand. Of course, there are other contributing factors such as politics and and the War in Iraq, and general instability in the Middle East.

Demand has grown in large part due to the continuing rapid economic growth of China and India. As the two largest economies of the developing world, both consumers and manufactures are guzzling up energy at incessantly increasing rates.

Taxes currently account for another 11%. In 2007, taxes (not including county and local taxes) accounted for about 15% of the cost of a gallon of regular gasoline.

Additional city and county taxes can have a very big impact on the price of gasoline in some locations as well. From 2000 to 2007, combined taxes averaged about 24% of the retail gasoline price.

Refining costs account for approximately 10% of the price, although this particular component varies from region to region, due in part to the different gasoline formulations required in different parts of the country.

When we ask why are gas prices so high, we usually (wrongly) assume much of it is distribution and marketing. In fact, distribution, marketing, and retail dealer costs and profits in 2007 were 10% of the gasoline price, down from the 2000 to 2007 average of 12%.

Most gasoline is shipped from the refinery first by pipeline to terminals near consuming areas where it may be blended with other products (such as ethanol) to meet local government and market specifications, and is then delivered by tanker truck to individual stations. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase gasoline from refiners and marketers for resale to the public.

The price on the pump includes the retailer’s cost to purchase the finished gasoline and the costs of operating the service station. It also reflects local market conditions and factors, such as the desirability of the location and the marketing strategy of the owner.

Why are gas prices so high? Unfortunately, knowing the answer doesn’t solve the problem, and virtually all experts agree that it is a long-term problem. High gas prices are here to stay, for at least a few years. Fortunately, we can mitigate these high prices with gas mileage devices and through gas mileage improvements.