What are your drivers really paying for at the gas pump?
As you consider how to best manage fuel expenses for your fleet, you probably can’t help but wonder, “What exactly are we paying for when we get gas?” You’ve surely seen prices of gasoline increase and decrease dramatically in recent years, but why? Well, the price of a gallon of regular gasoline can be broken down into four main components: crude oil, refining costs, distribution and marketing, and taxes. The degree to which these components contribute to the overall price can vary depending on a number of variables.
Crude Oil 46%
Of the many components that go into the price of gas at the pump, the biggest of those is currently the price of a barrel of oil (also known as crude oil). This is the average price of crude oil purchased by refiners. Gas prices can rise or fall based on the type of crude oil available on the market. Oil that is easier and cheaper to refine has been running low in recent years. While there is still plenty of crude oil available, it is heavy oil that requires many refineries make costly updates or even replacements to their machinery to handle this type of oil.
Refining Costs 25%
Less than a decade ago, refining costs were responsible for the smallest portion of a gallon of gas (about 8%). However, as the oil that is easy to refine becomes more scarce, the refining costs rise to manage refining the lower quality crude oil. The cost of refining can also vary seasonally. Refineries need to retool to produce different blends of gasoline in the summer months to meet summer demands. This raises the cost of refinery operations.
Distribution & Marketing 13%
This number is calculated by finding the difference between the sum of crude oil, refining and taxes, and the average retail price from the EIA’s weekly survey. Distribution refers to gasoline being shipped from the refineries to distribution points and then to final gas station locations. The price of this transportation of gasoline is passed along to the consumer, as is the marketing of the individual brands of oil companies.
This number comes from a monthly national average of the taxes applied to gasoline (both state and federal). There may also be some additional fees included here such as underground storage tank fees, oil inspection fees, environmental fees, and more. Taxes are one of the biggest factors in the price of gasoline being so different across the United States. Competition among local stations, distance from oil refineries, and other regional factors can all affect the price.
Why is the price so volatile?
Events around the world such as military conflict or dramatic weather or weather damage can very easily affect the price of gasoline. Whether something affects the drilling or refining process, distribution to your gas station, or another part of the process, it will all cause an increase in the final price. While an increase in the price of gasoline can mean an increase in the price of shipping goods, economists don’t look at gas prices as a leading indicator of inflation. This is because the price of oil is far too volatile. The cost can swing up or down quickly in response to labor strikes, wars and weather. Plus, components like distribution and taxes can vary widely seasonally. Depending on when these components are calculated the retail price may not have yet caught up with the spot price increases. This could mean the refining cost may account for a much larger portion until the oil reaches distribution and that cost rises to match the change.
A Real Life Example
To get an idea of just how dramatically refinery issues can affect fuel prices, let’s look at BP’s Whiting Refinery in Indiana which was forced to reduce production due to an outage caused by leaking pipes in August, 2015. This outage cut the refinery’s crude oil distillation unit capacity output by about 50%. The initial estimate was that it would take near a month for BP to fix this problem. As a result, the wholesale price for gasoline in Chicago, Illinois increased by $0.60 per gallon in just 3 days. This caused regional gas prices to increase as well by as much as $0.32 per gallon.
While it can take the markets a few days to adjust to a sudden loss of production like this, the amount the price increases and how long it stays high depends three main things:
- How quickly the issue can be resolved
- How soon an alternative source of gasoline can be brought in
- The marginal cost to use an alternative supply in that region
To learn more about the unplanned refinery outage in Whiting, Indiana you can visit this article on the U.S. Energy Information Administration website. If you want to keep up with the changing prices of gasoline visit the Gasoline and Diesel Fuel Price page on the U.S. Energy Information Administration website. It provides the weekly fuel prices for the U.S. as well as even more detailed information about the breakdown in costs.