Why Your Unleaded Costs More than Your Neighbor’s: The Factors Affecting Gas Prices
Anyone who travels knows that gasoline prices are not all created equal – in some cases, crossing state lines to fuel up could save you more than $0.30 per gallon! And with gas prices soaring, ways to save money at the pump are on everyone’s mind. So, why is it that gas prices vary so much from one area – even from one gas station – to another? As with most commodities, the price you pay is affected by a wide range of factors – some economical, some logistical, and some political. The biggest factors are:
- Crude Oil Cost
First and foremost, the cost of gasoline depends on the cost of the raw material – crude oil. Like most commodities, its price fluctuates with supply-and-demand, as well as with inventory, exchange rates, political events and relations between trading countries, and even weather conditions affecting its extraction. The more difficult or complicated it is to get the raw material, the more expensive it becomes. The price differences are slightly equalized by America’s pipeline system for transporting crude oil, which helps balance out prices across the country (as a result, residents in the middle of the country pay slightly more and residents of the coasts pay slightly less than they would without the pipeline increasing availability of options).
As far as state-to-state differences go, the single biggest factor impacting gas price discrepancy is difference in tax rates from one state to the other. For example, in New York, where rates are highest, $0.50 of the price per gallon is taxes, whereas in New Jersey taxes form only $0.14 of the per-gallon price – which means that it’s definitely worth crossing the bridge to fuel up, if you can.
- Crude Oil Type & Availability
Prices also differ because of availability of crude oil – not just in general, but by type (there are over 55 different types of gasoline fuel sold across the U.S.). Some states have higher minimum requirements in terms of fuel quality. For instance, California has relatively high minimum standards to reduce air pollution. This means that there will be fewer fuel types available for retailers in those states to choose from, which in turn means higher prices.
- Transport Issues
Recent refinery closings have meant that many states need to bring in refined gasoline from neighboring states, which adds to the cost of fuel. Gasoline shortages and other logistical challenges – such as lack of available and suitable tankers and trucks – add to these problems.
- Cost of Doing (Small) Business
Many gas stations are independently owned and operated, so they may price their gasoline differently than their competitors to cover overhead expenses, lower purchase volumes, etc. This doesn’t necessarily mean that independent gas stations will always cost more, but it does explain why their prices may differ from the gas station down the road.
Gasoline prices – like those of all commodities – change in response to a wide variety of factors. While this list focused on differences between U.S. states, there are also other reasons why gas prices fluctuate over time – including the time of year (gasoline tends to be more expensive in the summer when the demand is higher), maintenance schedules at refineries (many do maintenance in the spring, which means that they produce slightly less at that time than during the rest of the year), weather events in areas that supply crude oil (such as hurricanes in the Gulf of Mexico), etc.
To learn more about the issues affecting oil availability and pricing, visit the U.S. Department of Energy’s website at http://www.eia.gov/