Unleaded gasoline is one of the major products refined from crude oil, and the value of the oil is the largest component in the cost of a gallon of gas. The price of gas will move in rough tandem up and down with the price of crude oil. There are other factors that affect the price of gasoline and which may cause gas to change price faster than the change in the price of oil.
A barrel of oil equals 42 gallons--the entire 42 gallons cannot be refined into gasoline. Out of a barrel of typical crude oil, refining will produce 19 to 20 gallons of gasoline, 9 gallons of diesel or heating oil, 4 gallons of jet fuel and 8 to 9 gallons of various other products. The refinery can adjust how much of each product is produced based on the type of crude oil being processed and the market demand for the different products.
According to the U.S. Energy Information Administration, a gallon of gas that costs $3.25 breaks down into these percentages: 69 percent of the cost is the value of the crude oil, 13 percent is federal and state taxes, 7 percent is refining costs and profits and 12 percent is marketing and distribution costs. The taxes, refining and distribution costs are relatively fixed, so changes in the price of crude oil can have a greater effect on the price of gasoline. If retail gasoline is $2.00 per gallon, only 50 percent of the cost is from the value of the crude oil.
Rising oil prices cause gasoline retailers to raise their prices immediately to avoid losing money on the next load of gas they purchase. The commodities and futures markets usually have the wholesale price of gasoline reacting quickly to changes in oil prices. When oil prices fall, retailers are reluctant to lower prices and the price of gas will move down slowly as stations cut prices to match their competitors. This dynamic can cause gas prices to rise rapidly and fall slowly in response to price changes for crude oil.
There are several other factors that affect the price of a gallon of gasoline. Seasonal considerations result in higher gas prices, especially in the summer as motorists drive more, pushing up demand. Refinery outages can cause a jump in gas prices even if oil is not moving. State regulations and mandates force refiners to refine special blends that cannot be sold in other states. Ethanol makes up 10 percent of unleaded gasoline in many parts of the country and price changes for ethanol will affect the price of gasoline.
Of the 7.14 billion barrels of oil used in 2008, 46 percent became gasoline. The price of crude oil and the price of gasoline are closely related and the gasoline market has become very adept at reacting to price changes, especially upward ones, in crude oil.
- Photo Credit high price of gasoline image by Chad McDermott from Fotolia.com
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