Why do gas prices seem to fluctuate wildly from week to week? From the viewpoint of the average consumer, it doesn’t make sense. How can a commodity product increase its price over such a short period? Let’s see if we can figure out what’s going on.

Several factors contribute to the cost of a gallon of gasoline:

1. The cost of crude oil. The cost of crude accounts for approximately 70% of the cost of gasoline. This is by far the most significant component. In turn, several factors determine the cost of crude oil.
   • Locating and acquiring the crude oil. It has to be found and taken out of the ground.
   • Once the crude oil is obtained, it must be transported to a refining facility.
   • Some companies only find and drill for crude; they do not refine the oil. These companies have to sell at a profit to stay in business.
     2. Refining the oil accounts for 5-7% of the cost of gasoline. This includes the refining process, as well as the transportation to gas stations and the profit. Did you know that gas stations frequently sell gasoline from other companies? Your local Shell station might get its gas from BP.
        • There’s probably no good reason to be loyal to a specific company unless you have a gas card.
     3. Sales and marketing. This is about 10% of the cost. It’s the cost of building and running the gas stations. It also includes the profit.
     4. Taxes account for about 15% of the cost of gasoline. These are both federal and state taxes.

Now that you understand the basic costs let’s examine why they can vary so much. The cost of crude oil is the most significant influencer of gas prices. Natural disasters, like Hurricane Katrina, can seriously impact the supply of crude oil. As you remember from economics 101, the demand goes up when the supply goes down.

When crude oil supplies are diminished, the refining companies will pay more to get the needed crude oil. When their costs go up, the price of gasoline goes up.

By the same token, when a disaster disrupts refining capacity, the supply of gasoline goes down. Gas stations are forced to pay more, so we all pay more – another case of supply and demand.

More Considerations That Affect Price

Indeed, you’ve noticed that there has to be more to it than just supply and demand or inflation. Starting with the price for gasoline from the 1960s and adjusting for inflation, gasoline should be under $2.00 / gallon. But it’s not!

These factors also contribute to the rising cost of gasoline:

1. The easy-to-get-to oil has been used. It is considerably more difficult and expensive today to find and obtain crude oil. So the oil companies are spending more to acquire it.
2. The quality of the crude oil is lower. This makes refining oil more expensive since it requires more expensive processing.
3. There are more political issues. Political uncertainty in the Middle East makes crude supplies more uncertain.
4. Speculation by investors. Many experts believe institutional investors drive the price by speculating on future crude oil supplies.

The experts say that high gas prices are here to stay, and we will never enjoy sub $2.00 gasoline again. While you might not like it, at least you now have some understanding of the factors that influence your cost at the pump.