Monday, May 23, 2011

What makes up the price of U.S. gasoline?

The price for crude oil is set in worldwide markets where many buyers and sellers react to market fundamentals, including assessments of current and future supply and demand factors.

But just how much does the price of crude impact U.S. gasoline prices? In November 2010, when the average retail gasoline price was $2.86 a gallon, crude oil accounted for 71 percent of that price.

So what makes up the other 29 percent of gasoline prices? According to the Department of Energy, combined federal and state taxes on gasoline accounted for 14 percent of the average price. The remaining 15 percent of the price on average covers the costs of refining, transportation and marketing. The DOE chart at left shows this average price breakdown.

There are very few consumer products whose price is driven so overwhelmingly by the price of the commodity behind it, as is the case for gasoline and crude oil. Consumers see this correlation everyday on gas station signs that display the fluctuating price of gasoline. In fact, as you can see in the chart below, gasoline prices have closely tracked crude oil prices over the past 10 years.