How are gas prices determined in the US?
June 10, 2005 9:52 PM   Subscribe

Does anyone know what specific factors go into determining the retail price of gasoline in the US?

I looked through earlier threads which touched on the way a retailer determines its price once it purchases the gasoline from a distributor, but I still have absolutely no concrete idea why gas prices go up and down. I know OPEC has a lot to do with it, and of course supply and demand (as with any other good or service), but the whole process seems shrouded in mystery.

Can anyone explain it to me in layman's terms?
posted by pikachulolita to Travel & Transportation (15 answers total)
I know this is a complicated question for which I can only help to answer but not answer completely. It is my understanding that gas prices can be affected at a local level. By this I mean that states counties and sometimes even cities and towns can call for specific requirements from fuel supplies. This means that gas that is less expensive in the next town over may well be so because they have less sophisticated requirements of the fuel sold there. While these change have little or nothing to do with the way your car behaves it can have affects on the way fuel burns. I learned this from one of the car magazines I subscribe to and this information may now be dated. If I look I should still have the article. I believe it was in "car and driver". This however offers only the the end of the story, I don't really know the begining.
posted by iwouldificould at 10:35 PM on June 10, 2005

<not being helpful>
Colusion and what the market will bear?
</not being helpful>

posted by PurplePorpoise at 11:29 PM on June 10, 2005

(1) What they pay for gas, which is its own kettle of fish. The concerns iwouldificould brings up go here; AFAIK the big thing as far as formulation goes is compliance with clean(ish) air laws.
(2) Time cost. Making a $0.10/gallon profit today might be better than making a $0.11/gallon profit next week.
(3) What they think they can get for it. More than simple supply-and-demand -- then we'd expect gas prices to just be the marginal cost of gas. There are collusive games that happen all the time. I raise the price on my gas by $0.10/gallon, and sometimes the station across the street does too, and we both make big bucks that day. Other times the station across the street doesn't, and I drop my price again later that day, or other times they raise their prices by $0.08/gallon, or do so for a while and then drop them again, whatever.
posted by ROU_Xenophobe at 11:29 PM on June 10, 2005

I don't know a whole lot about the subject, but someone I know at an oil refinery in Texas told me something interesting. He said that they (Diamon Shamrock) refine sour crude oil, where most refineries refine sweet crude. He says that sour is much cheaper, and more plentiful currently, and that they could charge alot less for their gas than they do, but the market sets the price. Apparently a sweet refinery can not refine sour crude, and vice versa, and that building new factories is expensive.

I realize this doesn't really answer your question, but I found it interesting none-the-less.
posted by Espoo2 at 11:35 PM on June 10, 2005

Espoo2, actually, that's exactly the sort of thing I'm looking for - all the little arcane factors that determine the price of oil, and then how the price of oil correlates to the price of gas (I think I read in another AskMe thread that there's a delay of about 6 months between a fluctuation in oil price and a resultant fluctuation in gas prices, for example).

The collusion angle is interesting as well. I always wonder who actually gets to set the price in a non-franchise station, whether it's handed down from Corporate or up to the manager's discretion. Anyone know?
posted by pikachulolita at 11:51 PM on June 10, 2005

1. cost of crude oil
2. cost of refining that crude to gas (depends on grade)
3. cost of transporting the oil and refined product
4. taxes
5. profit margin
6. war premium

If you google around for information on refining efficiency, then compare the cost of a barrel of crude with the cost of gas at your local pump, you will find that the bulk of the cost is in the crude itself. Refining is either not very expensive, or paid for by the other products (natural gas, asphalt, etc.). Taxes are usually the next biggest component. Transportation is surprisingly cheap. Profit and war premium depend on current conditions.

Also, the spot and futures markets have a long term impact on the price of petroleum products. When an oil company plays the markets well, it can reduce its costs or even out volatility in prices. When it plays them badly (as recently happened with a chinese jet-fuel supply company working on the PRC's credit) they can lead to higher prices.

The math is not hard to do. Complete information is not really available because much of this is proprietary information. You can find enough information on the internet to have a rough understanding of how things work, but probably not enough to run your own oil-services hedge fund.
posted by b1tr0t at 2:53 AM on June 11, 2005

Refinery capacity seems to have the most impact on day-to-day prices. Whenever there is a refinery fire or a facility runs into unexpected problems, the gas prices in the regional area are almost immediately impacted. You will see stories like this every time a refinery accident makes the news.

Moreover, taxes are a very large part of gas prices. In 2002, gasoline taxes averaged $0.42 per gallon across the US according to the California Energy Commission.

Individual states might also regulate the market to a great extent. In Louisiana, for example, retailers are required to sell gas at a 6% markup. See this article for more background.

Finally, for most oil-company owned stores (ExxonMobil, BP, Chevron, etc.), the price at the pump is set by a regional or district office and that consideration, in large part, depends on brand protection (don't want to sell cheaper than no-name gas) and what the market will handle. If you live near a gas station, watch carefully when prices are changed during the day (right after rush hour if they are going down and before if they are going up) and the week (they will always go up right before the weekend and are generally lowered in the middle of the week). Chart the prices in your area and you will likely start to see a pattern emerge after a few weeks.
posted by ajr at 4:55 AM on June 11, 2005

ajr is close ... i used to work at a family owned franchised shell station in the midwest ... the price of gas would be called into us daily by the distributor

there's something else people should know ... gas stations make no money on, and sometimes lose money on gasoline ... they only make money when you go into the store and buy a bunch of other stuff ... not only that, but they don't make a lot ... 2 to 3% profit is good in this business ...

the couple i worked for got there about 6:30 am and would leave around 7-9 pm, 7 days a week ... i once figured out that they were earning about 3 or 4 bucks an hour apiece, if they were making money ...

their real profit would come when they turned around and sold the franchise to someone else ... the simple truth is that it's very hard to make money in the gas station, convenience store business and you're not going to make a lot on one ... like my boss said, "we see a lot of money, we just don't keep it"

here's another interesting thing ... i'm sure people have noticed immigrants running a lot of these places ... aside from the observations that they're willing to work harder and have many family members to help them, there's something else that assists them ... they're exempt from some taxes in the first 7 years they run a business in this country ... it gives them an edge

even then, some of their places go out of business ... the margin is still too thin ... you'd think that when a store gets a box of poptarts or a bottle of aspirin from the distributor and adds a buck ... or when they're paying 50-60 cents for a 99c bag of chips (and the vendor will take back the chips you don't sell) ... the owners would be making tons of money, but it just isn't so ...

30 years ago, most of the gas outlets were full service stations that did car repair, too ... i cannot think of ONE of these stations that were in my hometown in 1975 that survived without either dropping the gas altogether and concentrating on repair work or converting to a c-store/gas station model ... the rest went out of business

to sum up, the retailer has zero control ... the contracts he signs are very restrictive and the system's set up so he can't make money from gasoline

don't ever buy one of these places thinking that you're going to make a ton of money ...
posted by pyramid termite at 5:46 AM on June 11, 2005

Retailers (the guys with the pumps) buy from wholesalers (the guys with the trucks) who buy from distributors, who get the product from the refinery. A key point in considering the day-to-day price differences is that a 2-cent per gallon change at the refinery is immediately transferred right down the line to the price at the pump. Hence it doesn't matter that the retailer bought his 1,000 gallons last week, when the price was different. And if he does not sell volume, he can take a serious loss if the price has dropped by a few cents, enough to wipe out his very small profit margin. Hence the emphasis on selling beer, cigarettes, and overpriced Cheetos.

Oh, and federal and local taxes are a huge part of the price per gallon. That's what pays for the construction work that you see on the highways right now.
posted by yclipse at 5:47 AM on June 11, 2005

From the Department of Energy: A Primer on Gasoline Prices.
posted by diftb at 7:18 AM on June 11, 2005

When I worked at a local gas station in high school, our price was whatever the Shell up the street charged, minus 5 cents.
posted by sohcahtoa at 8:24 AM on June 11, 2005

I'd just like to quickly point out what I mentioned in a similar thread: There is no such thing as "branded" gas. It's all the same physical stuff, only with different amounts and types of soapy additives. Exxon doesn't have special gasoline that only gets sold in Exxon stores. It all gets pulled from the same inventory that every other store uses. So, Mom-n-Pop's Premium is exactly the same as Exxon's Premium, except Exxon adds their own special soap.

In our case, prices are set by looking up the wholesale price at that moment on a DTN machine, comparing that to what other gas stations near us are selling for, and pricing competitively if possible. This is sometimes complicated by large chains like Sheets, who are willing to sell their gas for exactly what it costs them to buy it. They're literally making no profit on the gas, since their main source of income is the food they sell inside the stores (this is often the case, even with smaller stores).

In some states, there are laws against selling below cost, but you're still allowed to sell it at cost.

Mostly, it boils down to local politics. In one particularly strange case, one of our stores was open from 8am-8pm, while the neighboring Shell was open 24 hours. We competed with their station on our price, consistently staying one cent below them. This was in a location that did not require the above-cost sale of gas, so we got down to around 60 cents a gallon by going back and forth all day. However, when we closed, Shell would raise their price back up to 1.60 right away. This resulted in them getting a bad reputation for such huge swings in prices, even though it was just the result of insane competition.
posted by odinsdream at 10:29 AM on June 11, 2005

I always figured rent had something to do with it, too. The land a gas station sits on in Bel Air has to cost more than the same amount in Inglewood, right?
posted by BuddhaInABucket at 10:35 AM on June 11, 2005

In some states, there are laws against selling below cost, but you're still allowed to sell it at cost.

(Beat me to it...) This pops up Minnesota from time to time. The state recently got on the case of some stations who were selling below cost, after the activity drew the attention of local tv news.
posted by gimonca at 6:51 AM on June 12, 2005

The land a gas station sits on in Bel Air has to cost more than the same amount in Inglewood, right?

I think that does play some part, in the same way it affects supermarket prices. In Milwaukee, gas downtown, and in the city itself is higher than in the first ring of suburbs, then as you get out farther into the suburbs the prices start to rise again.
posted by drezdn at 8:25 AM on June 12, 2005

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