Gasoline prices follow production costs and the consumers’ willingness to pay. When production costs increase or when there is higher demand, then gasoline prices will rise. Prices fall when production costs or demand decreases. The consumer response to price changes for gasoline also affects how much prices increase and decrease. Producers’ response also affects the price. If prices are high enough, producers will determine that the costs to expand production are worth the expense. The most important factors in gasoline prices in the US are worldwide supply, demand and competition for crude oil.
Factors Affecting Gasoline Prices
While gasoline prices are up all over the country, only three states (Hawaii, California and Alaska) are over $4 per gallon. These price increases began in February. In comparison (as of March 7, 2012), people in the Netherlands are playing 1.819 Euro/liter ($9.05 per gal.) and the British are paying 1.740 Euro/liter($8.69 per gal.) (The US average is 0.767 Euro/liter).
The price you pay at the pump for gasoline includes the price of crude oil, taxes, refining costs, distribution and marketing costs, and profit margins. Taxes vary by state. The American Petroleum Institute tracks gasoline taxes by state.
Gas prices had been relatively low since the last hike in 2008 when gasoline was above $4 per gallon in some parts of the country. When looking at gasoline prices, we have to look at crude oil. The price per barrel on March 8, 2011 was $124.44 for Brent Crude and $106.90 for West Texas Intermediate (WTI).
Crude oil prices had been higher in January as well, despite a lower demand for crude oil in the US. This suggests that US demand for oil is not impacting the crude oil price as much as the demand from other countries.
Why Two Different Commodity Oil Types?
There are a few other types of oil, but the commodities market reports two types. West Texas Intermediate (WTI) is also called light or sweet crude. The price is fixed at Cushing, OK. WTI has a lower density than Brent crude and has a lower sulfur content (0.24%) WTI is easier to refine and a lower environmental impact. WTI is produced and refined in the US.
Brent crude oil comes from 15 oil fields in the North Sea and has a higher density and sulfur content (0.37%). Brent makes up two-thirds of the oil consumed by the US.
The price difference between WTI and Brent is because of an oversupply of crude in the Midwest. Cushing has fewer pipelines and thus more storage creating the lower price. WTI prices will likely catch up to Brent when the Seaway pipeline becomes operational in April 2012. The Seaway pipeline will allow more WTI to get to the Gulf coast where it can be refined.
It may seem surprising that higher quality oil would be cheaper, but if the oil cannot get to the refineries, it’s not worth as much.
The cost of crude oil is the largest percentage of gasoline prices. In the latest data from the US Energy Information Administration, crude oil was 76% of the price of regular grade gasoline in January 2012 with the average retail price of $3.38 per gallon.