What Makes Up the Cost of Gasoline?

by : Bob Jent

When we think about gasoline prices, we usually only get as far as contemplating the ever changing price per gallon or begrudgingly recounting how much we spent on our last fill up at a gas station. In the United States, we rely on gasoline for transportation today more than ever, and it only takes one look at the packed roadways to see that a lack of gasoline would leave most of us helplessly stranded. Like other products, the money spent on gasoline is divided among entities throughout various levels of the supply chain that are responsible for ultimately delivering the end product to us. Here we examine how the money we spend on gasoline is divided among the various constituents of the supply chain.

The largest portion of the cost of a tank of gasoline is attributed directly to the cost of crude oil. The Organization of the Petroleum Exporting Countries (OPEC) determines the going rate per barrel of oil based on current production as well as the type of oil that is available. Even anticipation of supply reduction is enough to prompt prices at the pump to rise. OPEC additionally takes into account the production levels of countries who are not members of the organization, such as the United States, Mexico, Canada, China and Russia in determining rates for oil.

An estimated slightly more than a quarter of the cost of gasoline is attributed to the cost of refining the oil. Refining is the process through which crude oil is separated into different parts so that it may be used in the products we use, such as gasoline, plastic, jet fuel, and many others.

Federal and local taxes are of course included in gasoline prices as well. Federal taxes on gasoline are currently 18.4 cents per gallon, with states individually collecting additional taxes averaging around the same amount.

A smaller portion of the price we pay for gasoline accounts for distribution costs as well as marketing for the oil company. Once crude oil is extracted from the earth, it must be transported to refineries, and again transported through other distribution channels to gas stations for purchase and consumption. The cost of this transportation is incorporated into the price the consumer pays for gasoline at the pump.

Service stations where consumers purchase gasoline also add markup to the established prices determined by the factors above. No established standard exists for determining how much this markup should be, though some states regulate markup to maintain fairness among large corporation and local businesses.