Have you ever wondered why you pay what you do at the pump? While many assume the price of oil is tied only to the price of a barrel of crude, there are quite a few other factors that make up what you see on the sign at your local gas station.
When it comes to the price of a gallon of fuel, here’s what you are paying for:
- Crude oil: Yes, the price of a barrel of crude oil is the main component. This factor is broken down by the monthly average of the refiner’s acquisition cost – essentially the average price of crude oil purchased by a refinery.
- Refining costs and profits: This component represents the difference between the monthly average of the spot price of gasoline and the average price of crude oil at the time it is purchased by a refinery.
- Taxes: Both states and the federal government tax gasoline. The tax component is represented by a monthly national average of federal and state taxes applied to either gasoline or diesel fuel.
- Distribution and marketing: These costs make up the difference between the average retail price of gasoline plus the sum of the other three components.
- Market uncertainty: We’ve seen it time and time again: Global upheavals dramatically impacting the price of gasoline. Unfortunately, this component is the most unpredictable and least understood.
One thing to note is that the second and fourth components vary depending on the time of calculation. There is generally a lag between when the spot and retail prices change. When prices increase or decrease on the spot market, retail prices will take a bit of time to adjust. So next time you are pulling into the pump and take a gander at the price, remember that a number of varied and complex components go into that single price-per-gallon.