We see gas prices as numbers that are constantly changing pinned up on the side of the road as we drive by. We always comment on how a particular location can save you a few cents per gallon and act shocked when the changes seem more than we expected from day to day. The truth of the matter is, people speculate and often blame surprising sources on the volatile variation that comes with gas prices but often understand the minutia of their origin and all the factors that influence the amount we end up paying at the pump.
In the last few years, gas prices have been riding an insane roller coaster and lately, concerns are becoming real due to so many factors affecting their stability. In one side we have consumers that are demanding more and are becoming conscious about the environment; this creates a need in the market that is motivating companies to find better alternatives that can drive us away from traditional gasoline. On the other side, we have possible geopolitical conflict paired up with new economies that want their piece of the pie and a growing middle class that is purchasing automobiles and becoming dependent on gasoline rather quickly. These are some of the reasons why this is worth looking into and understand how these numbers come to be, so today in Suzzanne Uhland’s blog we will take a look at all the moving pieces and details that influence what happens to gasoline prices around the world.
The cost of crude oil
The price of crude oil according to the U.S. Department of Energy averages around 68% of the total retail cost of gasoline at the pump. We could write a large number of articles detailing just the intricacies that define crude oil prices themselves, but we won’t get into that on this occasion. What you must understand is the fact that while people believe crude oil is pretty much the only factor that matters when it comes to the prices of gasoline, it is actually surprising that the percentage is so low. When it comes time to blaming someone for the prices of gas at the pump, you have to realize that the price of crude is only about halfway responsible.
Supply and demand
This one is obvious if you know one of two things about business. Oil isn’t all created the same and it isn’t extracted the same way depending on the geographical location, local regulations and the availability of new technologies for the extraction of crude and production of oil worldwide. Countries like China and India with such high population are becoming key players into the demand for gasoline. The growing middle class has now access to more vehicles and are using gasoline more than ever before, that in itself is enough to create a much higher demand on the product and influence prices. Being as it may, the elasticity of price variations due to supply and demand is surprisingly scarce when it comes to gasoline.
Taxes and inflation are the areas where the biggest increases in gasoline prices come from. Inflation, for example, is one of the most important factors that drive prices and our perception of acquisitive power, yet people often forget to bring that into account when it comes times to look at the price of gasoline. An item that cost $1 in the 50’s can cost almost $10 today if we look at only inflation. With that in mind think about gasoline that used to cost about 35 cents a gallon 60 years ago.
Federal and local taxes today account for about 20% of the total price of gasoline and that number is continuing to rise in the past few years. These numbers varied from country to country, but if you look at it from an objective standpoint, they are surely the one factor that can truly offset the balance when it comes down to it.
Oil doesn’t get extracted and it immediately becomes available for you to purchase and put inside your vehicle. You have to being by understanding that not all crude oil that gets extracted is in the same condition and that getting it into a state that makes it viable to refine. Crude oil has impurities and a viscosity that deems it suitable for sale or that forces production to take extra steps to get it where it needs to be. Local regulations also dictate the type of gasoline that can be sold in certain regions of the world; these restrictions highly affect the way refining methods are employed and how the process culminates.
Marketing and distribution
Just transportation alone makes up a considerable portion of gas prices; on top of that, you have to consider all the logistics that go into moving a commodity of this magnitude and the marketing efforts that clearly go into the endeavor. Around 8% of the total price comes from distribution and marketing.
* Featured Image courtesy of Serge at Flickr.com