Why Are Gas Prices Going Up? A Breakdown of the Costs

Gasoline prices are influenced by global market forces, the processes of transforming raw materials into fuel, and delivery expenses.

Global Crude Oil Market Dynamics

The cost of crude oil is the primary factor in retail gasoline prices, often accounting for 50% to 60% of the final price. Global supply plays a significant role, with decisions by the Organization of the Petroleum Exporting Countries and its allies (OPEC+) directly impacting worldwide crude oil availability. OPEC+ members control nearly half of global oil production and most proven reserves, allowing their coordinated production adjustments to influence prices. Even small changes in their output can notably affect global oil prices.

Non-OPEC countries account for about 65% of global crude oil production, reacting to market prices rather than setting them. Increases in non-OPEC supply can lead to lower prices by adding to the total global volume. The balance between global oil supply and demand is also reflected in inventory levels, which can signal market tightness or surplus.

Global demand for crude oil is heavily influenced by economic activity. Economic growth, especially in large consuming economies, increases demand for transportation fuels. Economic slowdowns reduce demand, lowering prices. Seasonal patterns, like summer travel, also boost demand.

Geopolitical developments make crude oil markets volatile. Conflicts, political instability in oil-producing regions, and international trade policies can disrupt supply chains and create uncertainty. Sanctions imposed on major oil producers, for example, can reduce global supply, leading to higher prices. These events often add a “geopolitical risk premium” to prices, reflecting concerns over future supply disruptions.

Financial market speculation also influences crude oil price movements. Traders and investors engage in futures trading, anticipating supply and demand trends, which can amplify price changes. Speculative activity can add a significant amount per barrel to crude prices. This adds another layer of influence beyond physical supply and demand.

Refining and Production Costs

Crude oil undergoes refining to become gasoline and other petroleum products. This process incurs substantial operational costs, a significant component of the final price. Refining costs and profits typically represent 10% to 15% of the retail gasoline price. The cost to refine a single gallon can range from approximately $0.30 to $0.70.

Refinery operations and capacity utilization affect gasoline supply and pricing. Refinery shutdowns, whether planned or unexpected (e.g., due to incidents or weather), can reduce gasoline production. High utilization rates (often near 95%) limit flexibility to increase output quickly. This makes the market sensitive to capacity reductions, leading to rapid price increases.

Seasonal changes also influence refining costs. Gasoline formulations differ seasonally to meet environmental regulations and ensure optimal engine performance. Summer-blend gasoline, designed for lower vaporization rates to reduce air pollution, is more complex and expensive to produce. The transition from winter to summer blends can cause temporary price increases.

Refineries are energy-intensive, consuming natural gas and electricity. Energy cost fluctuations directly impact operating expenses. Rising energy prices are passed to consumers as higher gasoline prices. Energy and utilities can be 30% to 40% of a refinery’s operating budget.

Taxes and Distribution Expenses

After refining, gasoline incurs costs for taxes and distribution. Taxes are a fixed, per-gallon cost contributing to the final retail price. The federal excise tax on gasoline is 18.4 cents per gallon. This federal tax has remained unchanged since 1993.

State and local governments also levy excise taxes, which vary by jurisdiction. On average, state and local taxes add approximately 34.24 cents per gallon. Combined, federal, state, and local taxes typically account for 13% to 17% of the total price paid at the pump. These tax revenues often fund transportation infrastructure projects.

Distribution expenses cover transporting gasoline from refineries to bulk terminals and then to retail stations. This involves pipelines, marine tankers, railcars, and tanker trucks. These costs are factored into the price. Distribution and marketing costs typically make up 5% to 15% of the gasoline price.

Marketing and retail operations at gas stations are the final stage. Gas stations incur operating expenses like rent, utilities, labor, and maintenance. Retailers also aim for a profit margin. These costs and margins are incorporated into the pump price, reflecting business expenses. Local market conditions, including competitive pressures, can also influence prices.