Why Is Some Gas Cheaper Than Others?

Gasoline, a refined petroleum product, fuels most vehicles in the United States. Its price is not uniform across locations, fluctuating based on a complex interplay of factors before it reaches the pump. Understanding these influences reveals why some gas is cheaper than others, stemming from global markets, government policies, and localized retail conditions.

Costs Before the Pump

The cost of crude oil constitutes the largest portion of gasoline’s retail price, often ranging from 50% to over 60% of the total. Global supply and demand dynamics, influenced by geopolitical events, economic performance, and inventory levels, dictate crude oil prices. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) can significantly impact global oil prices through production decisions and quotas.

After acquisition, crude oil undergoes refining, a process accounting for approximately 25% of gasoline’s retail price. Refineries incur operational costs, including labor, energy, and maintenance, to transform crude oil into various petroleum products. Producing different gasoline blends for different seasons and regions is a notable cost factor. Summer-blend gasoline, required by environmental regulations to reduce smog, is more expensive to produce than winter blends due to additional processing.

After refining, gasoline is transported from refineries to distribution terminals and then to individual gas stations. This distribution and marketing phase typically adds around 11% to the retail price. Transportation methods include pipelines, marine vessels, railcars, and tanker trucks, with pipelines generally being the most cost-efficient. Transport costs vary significantly based on distance from the refinery and available infrastructure, affecting wholesale prices.

Government Influence

Government-imposed taxes significantly contribute to the final price consumers pay. These taxes are levied at multiple levels, including federal, state, and sometimes local jurisdictions. The federal excise tax on motor gasoline is currently 18.40 cents per gallon, which includes an excise tax of 18.30 cents and a 0.1 cent federal Leaking Underground Storage Tank fee.

State excise taxes vary considerably across the United States, averaging 32.44 cents per gallon as of January 1, 2024. Some states also apply sales taxes to gasoline, calculated as a percentage of the price. Local governments may impose additional taxes, further contributing to price disparities between neighboring areas.

These taxes generally account for about 14% of gasoline’s retail price and are typically earmarked for funding transportation infrastructure projects. The variation in these tax rates is a primary reason why gasoline prices can differ substantially from one state or locality to another.

Local Market Dynamics

At the retail level, several factors contribute to price differences between neighboring gas stations or within a single city. Local competition plays a substantial role, as stations often adjust prices based on competitors. This competitive pricing can lead to noticeable variations, even for stations located just blocks apart, as businesses vie for consumer traffic.

Operational costs for individual gas stations also influence pricing. These expenses include rent, employee wages, utility bills, equipment maintenance, and environmental fees. Stations also incur costs related to accepting credit card payments, a significant expense given transaction volume. These fixed and variable costs must be covered by the retail price of fuel and other sales.

Branding and marketing expenses further differentiate prices. Major branded stations, affiliated with large refiners or marketers, may have higher overheads due to franchise fees or advertising costs. Independent stations often compete on price by maintaining lower operational costs. The profit margin for gas stations on fuel sales is relatively small, often just a few cents per gallon, with a greater portion of their income coming from in-store sales.

Local supply and demand dynamics also affect retail prices. Areas with higher population density or heavy traffic may experience increased demand, influencing pricing. Seasonal demand, such as during summer travel, can also lead to temporary price increases due to higher consumption. Stations may adjust prices based on immediate, localized conditions, reflecting the balance between available supply and consumer demand.