Factors That Influence Prices At The Pump
No matter where you live, the price of gasoline impacts your life on a daily basis. While commuting to and from work, you might check the prices at gas stations on your way home to determine when or where is the best time to fill up to perhaps save a few bucks. While the price at the pump affects us all, businesses in the downstream fuels industry have many factors to consider when determining gas prices.
That’s why fuel marketers rely on comprehensive market data and analysis to stay on top of supply and demand trends. Let’s take a look at some facts about gasoline, as well as some of the factors at work behind the scenes in the petroleum industry that can influence gas prices.
How Gasoline is Made
Before it makes its way to your fuel tank, the process of making gasoline starts with the extraction of crude oil. Through a process called fractional distillation, crude oil is then broken up into different parts, such as gasoline, diesel, kerosene, and bitumen. In fact, originally, gasoline was thrown out as an unnecessary byproduct of kerosene production! It wasn’t really until the invention of the internal combustion engine that gasoline was viewed as a useful fuel.
Once the gasoline has been separated from the other components, it is further refined to make better quality fuel. Of course, before selling fuel at the pump, there are certain additives, such as detergents and antioxidents, that are mixed into the gasoline to improve engine performance.
What is Included in Gas Prices?
The price at the pump covers more than just the cost of the fuel. In general, there are four categories that make up the cost of gas:
- Distribution and marketing (10-14%)
- Federal and state taxes (16-22%)
- Refining costs and profits (14-24%)
- Crude oil prices (43-56%)
Let’s take a look at each of these costs one by one.
Distribution and marketing
Once the crude oil is purchased and refined into gasoline, it still needs to be sold and delivered to individual gas stations. These distribution and marketing costs include running ads and promotional campaigns, as well as ensuring the transportation of the refined fuels to their final destinations. Because some areas are harder to reach than others, those locations generally have higher gas prices to make up for the extra cost of transportation.
Federal and state taxes
For each gallon (or liter) of gas sold at the pump, there is a chunk of state/province and federal taxes that are added onto it. It might surprise you to realize just how much of your final gas bill is taxes. In Canada, the range is between 16.2 cents and 49 cents per liter, depending on the province/territory. In the US, you’re looking at a range of 13.8 center to 62.5 cents per gallon, depending on the state.
Refining costs and profits
Operating a refinery costs a lot of money. There is expensive machinery to purchase and maintain, workers’ salaries to pay, and raw materials to procure. In addition, refineries sometimes need to be “shut in” due to natural disasters. As you can imagine, there is no on/off switch for such a major endeavor. The long and complex procedures needed to stop and restart refinery production are costly in both time and money. Plus, on top of all the operational costs, it’s important to make a profit, too. These costs can quickly add up and increase the price at the pump.
Crude oil prices
Crude oil prices are most likely the most volatile costs associated with gas prices. Since crude oil (or petroleum) is the main component in making gasoline, the cost of gas at the pump is directly related to the cost of crude oil. On average, a 42-gallon barrel of petroleum is between $50-$70 US. Of course, that price can fluctuate drastically, contributing in turn to the rise and fall of gas prices.
Fuel sellers closely monitor the many factors that affect oil prices to keep up-to-date with market trends and stay competitive with their pricing.
What Affects the Cost of Crude Oil?
Understanding the market changes for crude oil is no easy task. There are many different factors that play a part, and each is unpredictable. If you’re in the petroleum industry, though, you realize the importance of tracking the factors affecting market prices.
Politics and weather
Many of the world’s oil reserves are in areas that face political unrest, such as Saudi Arabia, Venezuela, and Iran. Because of this, political uncertainties can raise questions about the consistent supply and distribution of oil.
Weather disturbances (e.g., hurricanes) can affect crude oil prices too. They can cause refineries to close down temporarily or be damaged, leading to a reduction in oil production. Even if these expected events don’t happen as forecasted, simply the fear of a decrease in a region’s supply can be enough to drive oil prices up.
During the COVID-19 pandemic, over a billion people around the world were under lockdown, hundreds of thousands of flights were grounded, and passenger car travel nearly ground to a halt. This had huge repercussions on the price of crude oil, as cost went below $0 per barrel; demand was so low that people were willing to pay others to take the oil off their hands.
The gasoline market is subject to fluctuation in response to consumer supply and demand. For example, in the summer months more people are travelling, and the demand for gasoline rises. The prices at the pump seasonally go up each spring in anticipation of higher consumer demand over the summer, particularly over holidays where there is historically a spike in road travel, e.g., Memorial Day and Thanksgiving.
US dollar value
Because crude oil is traded and sold in US currency, any changes in USD value affects the cost of oil. For example, if the dollar goes down, the price of oil goes up, so the sellers can recoup their profits. If the dollar goes up, the price of oil goes down because sellers can sell at a lower price while still maintaining their profits.
Tracking Gas Prices
Prices at the pump are complex and influenced by many factors. For the average consumer, understanding those factors isn’t usually a priority; the total cost to fill up their tank is. But if you are a fuel marketer, you need reliable, comprehensive data analysis of the demand for various petroleum products.
Refined Fuels Demand from DTN is a solution provides you with the operational intelligence you need to stay competitive as a fuel seller. A customizable daily data report keeps you up-to-date, allowing you to make informed business decisions. Request a free demo today and see how you can put these insights to work for you.