Around this time of year, Texans are faced with a pocketbook dilemma. Even so, almost invariably, the solution to the situation has been “go for it.”
Allow me to explain. The decision we struggle with during late springtime each year relates to whether we want to pay the increased price at the pump or curtail the amount of time we spend in our motor vehicles. In the past, the answer has always been to pay what it takes because we are so in love with our freedom to travel. It appears that the same answer is being given this year even as gasoline prices soar, some to near record proportions.
Paying more for gasoline is not something we like to do, but perhaps if we understand the reasons, it might help alleviate the discomfort to some degree.
The retail price of gasoline is determined by a host of factors. Among them are the outlays for the crude oil, refinery processing, marketing and distribution, taxes, and retail station operations plus the profits (and sometimes losses) made within these steps. The role each plays varies by percentage with the largest (53%) generated by the cost of crude oil, and the smallest (9%) attributed to distribution and marketing. Refining costs and profits and federal and state taxes are responsible for about 38%, equally divided between the two. Oil prices continue to be impacted by the uncertainty and political turmoil in several major producing regions, a phenomenon that seems unlikely to change in the foreseeable future.
Last week, gasoline prices jumped to a record national average of $3.07, which was about 20 cents higher than two weeks earlier. The previous nationwide average high was on August 11, 2006. Texans are fortunate to live in a state that is in the bottom 10 in average prices—$2.87. California residents are paying $3.49 on average!
Retail prices of gasoline have been generally rising for some time. Hurricane Katrina tightened supplies by reducing US crude oil production by approximately 25% and refinery operations about 10%-15%, but the horrific storm was only one factor in the price hike. Global oil demand has been increasing steadily, which has stretched the entire oil market system—production to transportation to refining—almost to its limits. No new refineries have been constructed in the US for some time, and major overhauls requiring the partial shutdown of several have been ongoing, which is certainly not helping.
If demand rises and supply cannot keep up, gasoline inventories sometimes slip. When that occurs, wholesalers grow concerned that supplies will not be sufficient over the short term and, therefore, bid higher for available product. Such an approach is typical of all commodity markets, but the problem with fuel is that there are few alternatives available. While consumers have the opportunity to substitute between food products when prices shift, there are essentially no fuel options for existing vehicles.
Even if the price of oil was stable and, of course, it has not been lately, fluctuating from $60 to $70 per barrel, retail gasoline prices normally climb before and during the summer when good weather and vacations beckon Americans to the road. The cost is typically about 10-20 cents higher during the spring and summer than earlier in the year.
Then there’s the matter of pipeline and transportation distribution. States closest to the Gulf Coast area, where about half of US gasoline is produced, normally have lower costs than those that must have their product transported by pipeline, ship, or truck. Kinks in the transportation system can also cause localized shortages and, thus, increases in bids for the available supply. Sometimes even when there is surplus supply in one region, the transportation is not adequate to support the flow of supplies, and prices remain comparatively high.
Environmental matters are another aspect of gasoline pricing as they require different gasoline formulations to reduce the emission of toxins. This complexity can be a strain for refineries at certain times of the year, as well as cause transportation and storage problems.
And, finally, competition in the local market plays its role. Though small in comparison, it is still highly important in the overall production and supply system.
As you can readily see, there are many aspects involved when it comes to determining what we pay for gasoline. Unfortunately, this information may not make you feel better when you fill your car up the next time, but at least you’ll have some idea as to why the price is so high.