From the fanciest cars to the equipment and machines in different industries such as construction, agriculture, and even technology, gasoline has been the primary fuel to make these things work and perform their functions.
Gasoline is considered as one of the most important and in-demand commodities used around the world today. Just like how humans need fluids in order to survive, many technologies, especially vehicles, rely on their source of fuel to power them up.
Unlike water which appear naturally on lakes, rivers, and streams, gasoline is not that readily available and easily produced. It is derived from crude oil, a dark material or substance found under the earth. Crude oil consists of hydrocarbons, an organic compound which can produce other petroleum products and gases such as butane, ethane, methane, and propane.
The chains of hydrocarbons in crude oil are separated through a process called distillation, which is done at any oil refineries. After the first stage of the distillation process, the initial gasoline created must undergo many different procedures. Some may use a substance called ethanol to be blended with gasoline to achieve the specific consistency needed while others may also use special additives to attain the desired octane rate and boost the engine performance of the gasoline.
After which, the refined crude oil substance that turned into gasoline will then be pumped into a complex series of pipelines and into different storage terminals and will eventually be loaded to gas stations.
Gasoline is one of the pivotal factors that greatly impact the daily lives of people. It is the major and principal fuel used for transportation worldwide. Individuals who use any form of vehicle are affected when there is an increase in gas prices. Not only that, the increase in gas prices will also most likely cause a domino effect to the prices of goods being transported from one place to another.
The price of gasoline is never constant and is always a subject to fluctuations. It is essential to know the factors that affect the rate of gas so that you will have a better understanding about it.
1. Crude Oil Price
Gasoline is a kind of fuel produced from unrefined petroleum liquids and crude oil. Meanwhile, crude oil is a non-renewable resource that can be acquired through drilling. Only a few countries in the world have oil reservoirs, and they play a crucial role since oil is one of the most significant resources every nation needs.
Crude oil price is the leading deciding factor that determines the price of gasoline. In January 2018, 59.4% of an average gasoline retail price encompasses the cost of crude oil in accordance to the data given by the US Department of Energy.
- Where does crude oil come from?
Crude oil is a hydrocarbon formed by the remains of organic materials from a long time ago. It is heated and compressed through the formation of sediment layers as time goes by. This hydrocarbon undergoes various natural processes beneath the Earth. Crude oil is then extracted by a method called drilling wherein special sets of equipment are used to drill holes to the ground and get the oil to stream up the wells.
From the data shared by the US Energy Information Administration (EIA), the United States is the top producing country of petroleum in 2016, producing 14.9 million barrels per day, followed by Saudi Arabia (12.4M B/D), Russia (11.2M B/D), China (4.8M B/D), and Canada (4.6M B/D).
- How is crude oil priced?
Oil is measured per barrel, which is equivalent to 48 gallons. The world has an estimated oil reserve of 1.3 trillion barrels, and 700 billion barrels are found in the Middle East. The price per barrel of crude oil is determined based on its type.
Technically, there are 161 types of oil out there, depending on the nature of use, chemical composition, and consistency – light to heavy and sweet to sour. However, in America, the most common type of oil used is the West Texas Intermediate (WTI). It is a high-quality crude oil that makes the refining process easy because of its sweet and light property. It is produced in various locations in the United States. WTI is an important type of oil since it has been made as a benchmark or standard reference for pricing in the oil market.
The next type is called the North Sea Brent Crude or Brent Crude. Like WTI, it is also a sweet and light type of crude oil and is extracted in the North Sea since 1966. Brent Crude is a popular benchmark in the European Nations.
A price benchmark that is generally cheaper than the WTI ($5-$6 higher) and Brent Crude ($4 higher) is the OPEC Basket. The Organization of the Petroleum Exporting Countries reference basket is the average cost of oil from its 14-member countries, including Iran, Saudi Arabia, and United Arab Emirates. OPEC oil prices are inexpensive compared to the first two types mentioned because some of its oils produced have high sulphur content.
Evidently, the countries that produce oil are the ones who have the upper hand and the control over the prices.
2. Law of Supply and Demand
The basic economics application about the relationship between supply and demand is also a relevant cause that affects gas prices.
When there is a surge in the number of consumers using gasoline to provide for their daily needs in transportation, farming, construction, and other emergency purposes, the demand for gasoline increases. However, due to the constraint in obtaining high-quality light and sweet types of oil, there has been a limited supply. This scenario makes gasoline prices climb higher.
Natural calamities and severe weather conditions can also trigger gas prices due to the potential increase in the demand of oil and the decrease in the amount of supply.
OPEC plays a vital role in this equilibrium. It produces more than 40% of the global oil supply and controls 60% of the total amount of crude oil traded in the world market. The number of barrels per day being released by this cartel has a significant effect to the prices of oil sold, and that will reflect to the cost of gasoline later on.
3. Refining Cost
The crude oil extracted from the ground is full of impurities and mixes of hydrocarbons that need to be refined first before it can fuel any vehicle or equipment. The oil is heated and boiled at high temperatures before it undergoes the distillation process where the chemical components of the crude oil are separated.
The refining costs vary, depending on the chemicals added to crude oil to achieve the needed consistency for gasoline and diesel. Before gasoline reaches the pump, refineries have to meet certain standards set by the government. This factor amounts up to 11% of the total retail price of gas in the US.
Seasonal variation also influences the refining cost of gasoline due to the differences in vaporization rates and formulas used.
Additionally, gasoline is refined according to its level of octanes or its performance level. A substance called ethanol is added to gasoline to achieve an optimum octane rating. Higher octane level means it is best preferred since it will meet the standard specifications of general types of engines. On the downside, higher octane levels of gasoline also indicate a higher manufacturing cost.
4. Marketing and Distribution Costs
According to Statista, 14% of the total retail price of gasoline is allotted for the marketing and distribution costs.
With almost 200,000 gasoline service stations spread throughout the United States, it follows a complex and complicated system with key players ranging from the largest industrial companies and corporations in the world to the single-station owners and dealers.
There is a network of pipelines from the refineries to the markets. Gasoline is also transported by rails to certain areas of the United States in the absence of pipelines. It is then collected by terminals and will be stored in huge tank farms. Upon putting it to a loading facility, some major oil companies place additives or special kind of detergents to the gasoline. After which, it is loaded inside a tanker with multiple sections to avoid mixing the gasolines with different octane or performance rating. The final stage of delivery is the storing of gasoline into the underground tanks of different gasoline service stations. The gasoline is now available for pumping into the consumer vehicle.
Gasoline service stations in a particular area may be owned by a major oil company or a single-station dealer. The cost of gas is dependent on the price set by the owner of the service stations. Their retail prices are usually determined and affected by either how much their gas supplier is charging them or the terminal price that is fixed and set by another party besides the supplier.
In general, the marketing and distribution costs include the transportation, utility, labor, and equipment costs of the gasoline retailers.
5. Taxes
In the United States, gasoline prices are subjected to federal and state taxes. Some places also include local taxes. Taxes enforced on gasoline occupy 18% of the total retail price of gas as of February 2018 according to the survey data of Statista.
- Federal Tax
Federal tax on gasoline is the tax amount emanated by the government of the United States since June 6, 1932. This already comprises the so-called Leaking Underground Storage Tank Fee that costs 0.1 centavo per gallon of gasoline and diesel. According to the Energy Information Administration (EIA), the tax imposed by the government on gasoline amounts to 18.40 cents per gallon and 24.40 cents per gallon of diesel as of January 1, 2018.
- State Tax
State taxes differ from state to state. As per the data given by the EIA for January 2018, the average state tax for gasoline is 28.31 cents per gallon and 29.33 cents per gallon for diesel.
Generally, states do not collect sales taxes from gasoline, but there are a few states that require additional sales tax, excluding the obligatory excise tax.
- Local Tax
Local tax is the amount levied by the local government allocated to fund for the local government projects, improvements, and services.
6. Inflation
Inflation is the rate of increase in the prices of goods and services compared to the purchasing power of a dollar or any currency of money. This inflation has adverse effects to people.
The rise and fall of the value of oil will cause the instability of inflation rate. Every nation knows the importance of oil in the economy. As previously mentioned, when there is an increase in the cost of oil, prices of goods will also follow. Thus, inflation is just around the corner waiting for its chance to rise up when situations allow it.
Conclusion
According to the US Energy Information Administration (EIA), in 2016, Americans’ average daily gasoline consumption is 392 million gallons. That amounts to more than a gallon per person.
Due to the unpredictability of the different factors that can sway the unstable prices of gasoline in the market such as the crude oil cost, refining cost, marketing and distribution cost, taxes, demand and supply, and the inflation rate, there is also a rise and fall in the cost of gasoline. It can be said that gas price is directly proportional to these factors.
Being one of the most in-demand commodities across different countries around the globe, gasoline price fluctuations would certainly cause negative effects to each country. With this, the government in each country must always be mindful and prepared to handle the effects that gas price instabilities bring to each and every citizen.
