How Gas Prices Are Determined

What we'll cover:

• Gas prices are influenced by a combination of factors, including crude oil prices, refining costs, distribution expenses, and taxes.
• Global crude oil cost is by far the biggest component of the price of gasoline.
• Gas prices tend to go up in the summertime when demand is high due to vacation travel and during major holidays when more drivers are on the road to visit friends and family.

If you’re planning to hit the road this summer, you may be curious about how gas prices are set.

Gas prices are influenced by a combination of factors, including crude oil prices, refining costs, distribution expenses, and taxes. The price you pay at the pump reflects these various components, which can fluctuate based on global events, seasonal demand, and regional supply chain dynamics.

Let’s take a closer look at some of these key factors. We’ll then go over a few tips that could help you save on the road.

1. The cost of crude oil

Global crude oil cost is by far the biggest component of the price of gasoline, according to the US Energy Information Administration.

If global crude prices go up, generally so does the price of gasoline. By one measure, for every $1 change in the price per oil barrel, it’s estimated that the price of retail gasoline goes up 2.4 cents per gallon.

Factors that can affect crude oil prices include geopolitics, supply and demand, seasonality, inventories, and market expectations.

Good to know: According to the US Oil & Gas Association, since 2020, crude oil prices have been responsible for over 90% of the gasoline price changes in the US on a quarterly basis.

2. Refining costs

To become gasoline, crude oil has to be refined first, and that refining process adds another layer of cost to the retail price of gas.

Generally, refinery expenses include things like labor, equipment, and compliance costs, which can vary by season and region. For instance, in the summer, refineries typically change their output to a fuel blend that adheres to air pollution standards, which can increase prices.

If other products like ethanol are blended with the gasoline, that can influence gas prices as well.

3. Distribution and marketing costs

After the refining process, gasoline must be delivered to its customers. Your gas prices reflect these distribution and delivery costs, which include all the transportation expenses for transferring gasoline from the refinery to the terminal and to your local gas stations (via pipeline, rail, truck, and by sea). And the cost of gasoline can go up based on how long it takes to deliver gasoline to its ultimate destination.

Then there are also marketing costs to consider. Oil companies and gas stations often turn to marketing initiatives like advertising campaigns, promotional activities, and customer loyalty programs to sell their gasoline.

4. Federal and state taxes

Federal and state taxes also contribute to the overall cost of gasoline. The federal gas tax stands at 18.4 cents per gallon. 

Meanwhile, state gasoline fees and taxes can vary widely, with Alaska having the lowest rate and California with the highest, according to the latest data from the Tax Foundation. Because state and local taxes differ, how much you pay for gas will depend on where you top off your tank.

5. Gas stations

Gasoline doesn’t shuttle itself to you: It relies on a complex distribution system, and gas stations are the end point of this retail supply chain.

Almost all gas stations are independently owned. The major oil companies own few gas stations comparatively. When setting prices, individual owners must factor in the local competition and replacement costs (i.e., paying for the next fuel delivery).

Potential ways to save on the road

Supply and demand can also impact gas prices. For instance, gas prices tend to go up in the summertime when demand is high due to vacation travel and during major holidays when more drivers are on the road to visit friends and family.

If you’re looking for ways to help save money on fuel and enjoy your summer driving, here are a few tips to keep in mind. 

1. Avoid sudden acceleration or hard braking

Don’t accelerate quickly or slam on the brakes. According to the US Department of Energy, if you’re zooming along the highway, these habits can cut your gas mileage by approximately 15% to 30%, and in stop-and-go traffic, it can reduce your fuel efficiency by 10% to 40%.

The New York State Department of Transportation goes farther, noting that jackrabbit starts and sudden braking can burn up more fuel by 40%, while only shrinking your travel time by 4%.

2. Moderate your highway speed

Speed undermines fuel economy: The faster you drive, the more gas you burn up.

• If you cut your highway speed by 5 to 10 miles per hour (mph), you can improve your gas mileage by up to 14%, according to AAA.
• Driving over 50 mph can hurt gas mileage: For each 5 mph you drive over 50 mph, you pay an extra $0.27 per gallon for gas, according to the US Department of Energy.