[Editor's note:  These are aricles I found on the subject.  There are more on the internet, but they said pretty much the same things.]

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ENERGY INFORMATION ADMINISTRATION, Offical Energy Statistics from the U. S. Government, http://www.eia.doe.gov/pub/oil/petroleum/analysis_publications/primer_on_gasoline

A PRIMER ON GASOLINE PRICES

Gasoline, one of the main products refined from crude oil, acounts for just about 17 percent of the energy consumed in the United States.  The primary use for gasoline is in automobiles and light trucks.  Gasoline also fuels boats, recreational vehicles, and various farm and other equipment.  While gasoline is produced year-round, extra volumes are made in time for the summer driving season.  Gasoline is delivered from oil refineries mainly through pipelines to a massive distribution chairn serving 168,987 retail gasoline stations throughout the United States.  There are three main grades of gasoline:  regular, mid-grade, and premium.  Each grade has a different octane level.  Price levels vary by grade, but the price differential between grades is generally constant.

What are the components of the retail price of gasoline?

The cost to produce and deliver gasoline to consumers includes the cost of crude oil to refiners, refinery processing costs, marketing and distribution costs, and finally the retail station costs and taxes.  The prices paid by consumers at the pump reflect these costs, as well as the profits (and sometimes losses) of refiners, marketers, distributors, and retail station owners.

In 2005 the price of curde oil averaged $50.23 per barrel, and crude oil accounted for about 53 percent of the cost of a gallon of regular grade gasoline.  In comparison, the average price for crude oil in 2004 was $36.98 per barrel, and it composed 47 percent of the cost of a gallon of regular gasoline.  The share of the retain price of regular grade gasolien that crude oil costs represent varies somewhat over time and among regions.

Federal, State, and local taxes are a large component fo the retail price of gasoline.  Taxes (not including county and local taxes) account for approximately 19 percent of the cost of a gallon of gasoline.  Within this national average, Federal excise taxes are 18.4 cents per gallon and State excise taxes average about 21 cents per gallon.  Also, eleven States levy additional State sales and other taxes, some of which are applied to the Federal and State excise taxes.  Additional local county and city taxes can have a significant impact on the price of gasoline.  Refining costs and profits comprise about 19 percent of the retail price of gasoline.  This component varies from region to region due to the different formulations required in different parts of the country.

Distribution, marketing and retail dealer costs and profits combined make up 9 percent of the cost of a gallon of gasoline.  From the refinery, most gasoline is shipped first by pipeline to terminals near consuming areas, then loaded into trucks for delivery to individual stations.  Some retail outsets are owned and operated by refiners, while others are independent businesses that purchase gasoline for resale to the public.  The price on the pump reflects both the retailer’s purchase cost for the product and the other costs of operating the service station.  It also reflects local market conditions and factors, such as the desirability of the location and the marketing strategy of the owner.

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(http://www.wisegeek.com/how-is-the-price-of-gasoline-determined.htm

HOW IS THE PRICE OF GASOLINE DETERMINED?

There are many factors that are important in determining the price of gas.  Demand has a major influence on the price of gas.  In the United States, demand for gas is often quite high during the spring and summer, as individuals take off for popular vacation spots and the whole country gets mroe active.  Gas prices often spike around the holidays, like Memorial Day and Independence Day.  However, this is not always the case, as prices do not always rise in the warmer months.

Sometimes the demand for gas puts a strain on refinery capacity.  Thsi often happens in the sring, when refinery maintenance is typically conducted.  While maintenance is performed, the gas market may tighten, resulting in a rise in the price of gas.  Fortunately, refineries are usually finished with maintenance by the end of May.

The price of gas is also influenced by oil in its most natural state–crude oil.  Basically, when desirable crude oil is less plentiful in supply, gas prices go up.  The price of gas is affected by the type of crude oil that is available.  Oil is described as light, heavy, sweet or sour.  Crude oil that is sweet and light is cheaper, less difficult to refine, and less plentiful in supply.  By contrast, heavy, sour oil is more difficult and costly to refine, yet is widely available throughout the world.

The cost of transporting and mareting crude oil has a significant effect on the price of gas.  Transporting crude oil involves moving it to refineries, followed by the shipping of gasoline todistribution points and, finally, gas stations.  marketing costs cover the amount of money spent in marketing an oil company’s brand.  Both costs are passed on to the consumer as increases of gas prices.

In the United States, federal, state, and local taxes account for a significant portion of the price of gas.  Taxes on gas are considerably higher in Europe than they are in the United States.  As a result, European gas prices are much higher than they are in the United States.

Individual gas stations play a role in the price of gas as well.  Typically, gas stations add something to the price of gas in order to profit.  There are no laws governing the amount a gas station may charge for its gas.  As such, some stations up their gas a few cents per gallon, while others add on 10 cents per gallon or more.  Some states, however, have laws that prohibit gas stations from charging less than a certian percentage of the total cost of their wholesale gas orders.  These laws are intended to protect smaller gas stations from being significantly under priced by large, chain gas stations.

The price of gas may also be influenced by such things as weather and major disaster.  World events and wars also affect the price of gas.  Basically, any event or situation that affects the drilling, refining, and transporting of oil can have a significant influence on gas prices.

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(http://www.thepriceoffuel.com;  copyright:  2005 – 2008 Chevron Corporation.  All Rights Reserved.)                                               

WHAT AFFECTS FUEL PRICING –

BASICS OF SUPPLY AND DEMAND

Supply and Demand:

The marketplace forces of supply and demand determine the price of fuel.  If demand grows of if a disruption in supply occurs, there will be upward pressure on prices.  By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices.

Those principles apply at the service station level as well.  If a retailer prices its gasoline too high, and without regard to competition, the retailer’s customers may take their business to another station with lower prices.  If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.

Competition among retail outlets thus affects pricing.  You may notice that sometimes there are price differences between two gasoline stations on a busy street corner and between those outlets and the only station on a long stretch of highway.  More choices generally mean more competition for business.

And although retail outlets may sell gasoline carrying the brand of a major oil company, most dealerships are owned and operated by independent business people who are free to set the prices for their products and services.

Crude Oil:

Like agricultural products, such as wheat and corn, and precious metals such as silver and gold, crude oil is traded on the world market.  Recently, crude oil prices have risen dramatically, driven by rising global demand and political instability in several oil-producing countries.

Crude oil prices are important in determining gasoline prices because crude is the primary raw material used to produce gasoline and other petroleum products.  In some cases, the price of crude oil may account for up to half the price of a gallon of gasoline.

Example:

There are 42 gallons of oil in each barrel of oil.  If the price of crude oil is $120 a barrel, the cost of the raw material require dto produce a gallon of gasoline is $2.86.  This figure does not include costs incurred from the refining process, transportation to distribution hubs or wholesalers, and delivery to retail locations.

Each gallon of gasoline also is subject to numerous taxes and fees, which vary by state.  In California, the price of gasoline includes a federal motor fuel excise tax,  a California motor fuel excise tax,  state and local sales taxes as well as other state and local fees totaling more than 63 cents a gallon.

After the crude oil is processed through the refinery, the finished gasoline product is transported to a terminal, where it may be sold to a wholesaler for distribution to the wholesaler’s retail network or delivered to the retail location.  There the retailer sets the “street price,” which includes a margin to account for the retailer’s cost of doing business at that particular location and the retailer’s profit.

Gasoline:

In recent weeks, the average U. S. retail price has increased for all grades of gasoline.  While crude oil is traded in a global market, gasoline is part of a regional market.  Crude oil prices are important in determining gasoline prices becasue crude is the primary raw material used to produce gasoline.  The price of crude oil may account for as much as half the price of gasoline.

Transitions in supply can also affect the short-term availability of gasoline.  Going into the peak summer driving season, refineries are adjusting their gasoline formulas to help protect the air quality in warmer weather.  And, because of changes to federal energy legislation passed in 2006, many states are phasing out the use of MTBE as a gasoline additive and switching to ethanol-blended gasoline.

Many states require specific formulations of gasoline–there are currently 18 separate gasoline formulas for different regions of the country–and it is often difficult to import gasoline supplies from one region to another.

Government Regulations:

Regulatory steps to reduce air pollution have also influenced gasoline markets.  Many states require the use of various blends of clearner-burning gasoline, often called “boutique fuels,” that are specially formulated to meet federal and state emissions regulations.  Gasoline sold in California is not the same as gasoline sold in Arizona or Las Vegas.  Creating these different fuels results in “island” markets and inhibits the ability of refiners and marketers to move supplies from one region to another to meet local or regional demand.  There are currently 18 separate formulas of gasoline mandated for different regions.

Another significant influence on gasoline prices are taxes, which can vary dramatically across different markets.  Differences in state and local sales and excise taxes can add as much as 40 cents per gallon (cpg) in certain areas.  The American Petroleum Institute reports the national average for gasoline taxes is 47 cpg.  Alaska has the lowest gasoline taxes in the country at 26.4 cpg, while California and Connecticut have the highest, at 63.9 cpg and 62.5 cpg, respectively.  New York is third highest at 59.6 cpg.

Permitting requirements for petroleum infrastructure can also affect gasoline markets.  Although demand for gasoline in the United States has grown over the years, no new refineries have been constructed since the 1970s.  In order to meet demand, the U. S. must import large volumes of gasoline and other petroleum products.

Natural Disasters:

In any market situation, supply and demand imbalances can affect prices in both short and long term.

If the supply is disrupted, as it was after Hurricanes Katrina and Rita, short term demand for the product may exceed the supply on hand and put upward pressure on prices.  Consumers all over the country, even those outside of the Gulf of Mexico region most directly affected by the hurricanes, observed a rise in prices at the pump.  Why was that the case?

The basic reason was the imbalance between supply and demand.  Gasoline, including gasoline blending components, moves from region to region.  When crude oil and gasoline production were shut in following Hurricanes Katrina and Rita, the country’s gasoline supplies were reduced approximately 10 percent.  Gasoline supplies were moved to the Southeast from other parts of the country, affecting supply in those areas.  That put upward pressure on prices, as supply was affected, but demand remained high.

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Crude oil is getting cheaper —

so why isn’t gas?

By CHRIS KAHN and JOHN PORRETTO, AP Energy Writers

AP – Gas prices posted at a Valero gas station in Hayward, Calif., Thursday, Feb. 12, 2009. Murmurs of price …

 

 

 

 

NEW YORK – Crude oil prices have fallen to new lows for this year. So you’d think gas prices would sink right along with them.

Not so.

     On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

     To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

     The price of gas is indeed tied to oil. It’s just a matter of which oil.

     The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That’s the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

     Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

     But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

     “We’re going definitely over $2, and I bet we’ll hit $2.50 before spring,” said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. “This is going to be an unusual year.”

     On the last day of 2008, gas went for $1.62 on average, according to the auto club AAA, the Oil Price Information Service and Wright Express, a company that tracks transportation data.

     The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

     That foreign oil sells in some cases for $10 more per barrel — and that doesn’t even include shipping.

     Brent North Sea crude, which feeds some East Coast refineries — and therefore winds up at many gas pumps around America — now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

     Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places.

     Now that the premium oil is suddenly very inexpensive, refiners elsewhere can’t get their hands on it.

     “It’s so cheap,” said Lynn Westphall, the senior VP of external affairs at San Antonio-based Tesoro, which owns a half dozen refineries on the West Coast and Hawaii. “But you can’t just build a pipeline to everywhere. We know we can’t get it.”

     Tesoro’s refineries in North Dakota and Utah use locally drilled oil and Canadian oil, which also has been running about $10 more per barrel than West Texas crude.

     So why not build more pipelines? Because investing billions of dollars over several years makes no sense when the prices could just flip a year from now to where they were before.

     “How long is WTI going to be cheaper than Venezuelan oil? Than Canadian?” asked Charles T. Drevna, president of the National Petrochemical and Refiners Association. “You just don’t build a pipeline like that.”

     At the same time, refiners have seen the same headlines as everyone else about job losses and consumer spending. They’ve slashed production just to avoid taking losses on gasoline no one will buy. Result: Higher gas prices.

     “Why should a refiner produce more gasoline when the stuff we produce is not being used?” Drevna said.

     Of course, complex explanations of the diverging price paths of West Texas crude and gas are unlikely to placate frustrated drivers. Memories of last summer’s $4-plus gas have not receded.

     “Drivers are being ripped off even more now than before,” said Stuart Pollok, who was filling up recently at a Chevron station in downtown Los Angeles. He pointed out Exxon Mobil Corp. reeled in billions in profits last year when oil prices neared $150.

Others see the conspiracy reaching higher.

     “It got really low during the elections and now it’s going back up,” said Christel Sayegh, a 23-year-old graphic designer in Los Angeles. “They do that every election, though, right?”

___

AP Energy Writer John Porretto reported this story from Houston. Associated Press Writers Jennifer Malloy and Ryan Nakashima in Los Angeles contributed to this story.

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