Soaring gas prices are affecting everyone. Why are we paying so much and when will costs go down? A multitude of factors determine the price we pay at the pump, but the largest determinant is the price of crude oil (the raw commodity that gets refined into gasoline). Crude oil prices vary depending on the supply available in the market and the demand for that supply. Let’s break down the 5 Ws that are currently affecting these prices (the Who, What, Where, When, and Why in order of importance below).
WHERE DOES THE PRICE OF CRUDE OIL ORIGINATE?
Crude oil prices are based on the global or international market, not the U.S. market. The Organization of Petroleum Exporting Countries (OPEC) is comprised of a group of countries that collectively control 78% of the world’s known oil supply.
Another group of countries, known as OPEC+, also participate in the OPEC’s directives in an effort to stabilize oil supplies around the world.
OPEC and OPEC+ use supply quotas to secure the highest, long-term prices for their members. OPEC+ member countries collectively agree on how much oil to produce, which directly affects the price of oil. As we emerge from the pandemic (when supply for gasoline was at an all-time low), OPEC has shown no interest in increasing production. Therefore, we currently have a high demand for oil and low supply.
The U.S. is a major oil-producing country and has the largest petroleum consumption in the world (the U.S. uses over 20 million barrels a day compared to world usage at approximately 90M). However, because we are not an OPEC member and lack control over the majority of the supply, OPEC has tremendous influence over the price of crude oil produced in the U.S.
PRICE PER BARREL OF OIL
WHAT OTHER FACTORS MAKE UP THE TOTAL PRICE?
Federal, state and local government taxes also contribute to the retail price of gasoline. The federal tax on motor gasoline is $0.184 per gallon, which includes an excise tax of $0.183 per gallon and the federal Leaking Underground Storage Tank (LUST) fee of $0.001 per gallon.
As of January 2022, the average state tax is $0.2606 per gallon. California has the highest state tax in the country at $0.511 per gallon. Additional taxes and fees including sales and/or use taxes, inspection fees, environmental fees, or other charges make up an additional $0.077 for a total of $0.588 per gallon. Other state totals come in at…
- New York: $0.3368
- Florida: $0.355
- Georgia: $0.2985
- Colorado: $0.2356
- Texas: $0.2
- Washington: $0.5222
A full list of state motor fuel taxes can be found HERE.
Refinery fires, equipment issues, worker strikes, and other issues that interrupt production are a regular occurrence for California refineries. When such hiccups arise, we cannot simply import fuel from another state to accommodate the loss in production.
Since 1991, California has prioritized reducing emissions from gasoline-powered vehicles. The state requires a cleaner gasoline blend that over the years has eliminated lead and tertiary-butyl ether (MTBE) and has set strict regulations for deposit control additives, reid vapor pressure (RVP), sulfur, aromatics, oxygen, benzene, T50, T90 and Olefins. The production of this eco-friendlier blend is costly. A shortage of California-blend gasoline could be solved by increasing imports, but it takes time to secure other resources. When a stop in production occurs, supply goes down, demand increases, and fuel prices rise.
In recent news, Governor Gavin Newsom’s promotion of zero-emission cars and proposed ban on new gasoline-powered cars (by 2035) could s-l-o-w-l-y shift the current state of supply and demand.
WHY DO PRICES CONTINUE TO INCREASE?
IMPACTS OF WAR
Almost two months into Russia’s invasion on Ukraine, the conflict has created the fastest-growing humanitarian crisis since World War II. How does this effect fuel prices? Russia is the second largest oil producer in the world. The U.S. ban on Russian oil and fuel imports means the U.S. must buy oil from somewhere else – most likely an OPEC country. The increase in demand for OPEC oil will send crude prices even higher.
There is uncertainty among other countries when it comes to buying Russian oil. There are complications with the Russian banking system as the U.S., European Union and other Western allies have imposed sanctions on much of the country’s banking system, including freezing hundreds of billions of dollars’ worth of reserves. Some tanker companies are unwilling to go into Russian ports to transport oil to other countries. Australia, Britain and Canada have imposed outright bans on Russian oil purchases following Moscow’s invasion of Ukraine. This drops the amount of supply on the market and drives demand higher on OPEC oil.
PRICE PER BARREL OF OIL
WHO CONTROLS THE PRICE OF GASOLINE?
Many are quick to blame President Biden for price gauging at the pump, but this is not the case. Prices are not determined by one individual or even one political party. The price is set by the market. In this hot-button debate, it is important to remember that oil companies in the U.S. are private firms that produce at their will to meet market demands. Domestic and diesel prices are driven by global crude oil prices, which in turn are shaped by global OPEC decisions and supply and demand. As the U.S. is not a member of OPEC, it has no influence over oil production or crude oil prices.
In November 2021, President Biden released 50 million barrels of oil from the Strategic Petroleum Reserve – the largest release in U.S. history. In 2019, U.S. petroleum use averaged approximately 20.5 million barrels of oil per day. While this move by President Biden was certainly encouraging, it had little to any effect on the price we pay at the pump.
WHEN WILL PRICES DECREASE?
In the sweltering summer months, gasoline has a greater chance of evaporating from a car’s fuel system, thus increasing emissions and smog. To compensate, refineries produce gasoline blends that have lower Reid Vapor Pressure (RVP), or lower volatility. Because California has some of the most stringent requirements on fuel emissions, a summer-blend fuel can cost up to 15 cents a gallon more as it is more costly to produce. For this reason, fuel prices are expected to rise in May. Gas stations have until June 1st to complete the changeover from winter-blend to summer-blend. The last day gas stations are required to sell the summer blend is September 1st. Experts agree we should see some relief by November 2022 as demand here in the U.S. eases and we switch back to a winter-blend gasoline.