Regional And Local Differences In Gasoline Prices example essay topic

The Price of Gasoline June 1, 2005 The Price of Gasoline What you are paying for when you buy a gallon of gasoline? Most people complain about the high cost of gasoline, but few understand how the price is calculated. Many people think this cost is for gasoline only, but many other factors determine what you pay at the pumps. Gasoline is a mixture of the lighter liquid hydrocarbons, and used chiefly as a fuel for internal-combustion engines "Microsoft Encarta", 2005). Crude oil accounts for nearly 17 percent of the energy consumed in the United States. Gasoline is one of the main products developed from crude oil in the United States.

The primary use for gasoline is in automobiles and light trucks. Fuel produced all year round, and is delivered from oil refineries through pipelines to a massive distribution chain serving 167,000 retail stations throughout the United States ("EIA Brochures", 2004). The prices paid by consumers at the pump reflect the cost to produce and deliver gasoline to consumers. Included is the cost of crude oil to refiners, refinery- processing costs, marketing and distribution costs, and finally the retail station costs and taxes. Approximately 27 percent of the cost of a gallon of gasoline is federal, state, and local taxes.

Another 14 percent is a combination of distribution, marketing, and retail dealer costs and profits. Refining costs and profits account for about 15 percent of the retail price of gasoline. This part varies from region to region due to the different formulations required in different parts of the country ("EIA Brochures", 2004). The average retail price for gasoline tends to be higher in certain States or regions than in others. According to the Energy Information Administration (EIA), other factors contribute to regional and local differences in gasoline prices aside from taxes. Special gasoline's are required in some areas of the country.

Environmental programs, aimed at reducing carbon monoxide, smog, and air toxins, require oxygenated reformulated, and low-volatility (evaporates more slowly) gasoline, which comes at a much higher price ("EIA Brochures", 2004). The proximity of refineries to crude oil supplies can be a factor, as well as shipping costs from the refinery to market. In addition, the areas farthest from the Gulf Coast are the source of nearly half of the gasoline produced in the United States, and thus, a major supplier to the rest of the country. However, these cures tend to have higher fuel prices do to transportation costs ("EIA Brochures", 2004).

Competition in the local market is another reason why gasoline prices can be different. Consumers in isolated areas may have to choose between higher local prices and the inconvenience of driving some distance to a lower-priced choice. In addition, competitive differences can be significant between regions with only one, or a few gasoline suppliers versus regions with a large number of competitors in close proximity ("EIA Brochures", 2004). Supply disruptions, such as scheduled or unscheduled refinery maintenance, can slow or stops production of gasoline for a short time, which can prompt a bidding war for available supplies.

Prices will remain high if the transportation system cannot support the flow of surplus from one region to another ("EIA Brochures", 2004). California consumes substantial amounts of gasoline - about 16 billion gallons per year. Crude oil, the primary component of gasoline, comes from within-state oil wells (42%), Alaska (22%), and foreign sources (36%). Nearly 90% of our gasoline is refined in state, but additional quantities of gasoline and blending components are imported because refineries cannot keep with the growing demand.

California is also isolated from other refining centers in the U.S. because the federal government as an air quality "non-attainment" area designates most of California. The gasoline in non-attainment areas must meet stringent air quality requirements to burn cleanly in order to protect public health and the environment ("California Energy Commission", 2005). In addition to the higher cost of cleaner fuel, California also has a combined state and local fuel sales and use tax of 7.25% o top of an 18.4% per gallon federal excise tax, and an 18% state excise tax. Refinery margins have also been higher due in large part to volatility in the region ("EIA Brochures", 2004). In the United States, gasoline prices rose to historically high levels between mid-December 2004 and mid-March 2005. Majority of the increase was by underlying cost of crude oil.

Crude oil costs increased are related to the falling value of the U.S. dollar, which is used by OPEC to price crude oil worldwide. The broad inability of the U.S. refining system to satisfy steadily rising gasoline demand, has also contributed to higher prices at the pump ("EIA Statistics, 2004"). Accordingly, to Robert A. Spear, (EIA statistics, 2004) domestic oil companies are no longer building crucial pre-season gasoline inventories. These stocks are needed to augment supply when refineries conduct post-heating season maintenance turnarounds, and to reduce supply vulnerability when unforeseen events occur. This was not a problem during the early 1990's when demand was lower and there was excess refining capacity. However, today's very high gasoline consumption coupled with low pre-season inventories, creates extreme market tightness at the wholesale level just when gasoline marketers are preparing for the busy driving season during the summer ("EIA Statistics, 2004").

While the price of a gallon of gas sometimes seems to fluctuate without rhyme, or reason, it is much easier to understand when you know the factors that go into that price. Whether it's the taxes charged by federal state, and / or local government, the amount of competition in the region, the region's proximity to a reliable gasoline supply or even emissions regulations. The price of the fuel we buy is carefully calculated and is subject to many variables. Informed consumers should understand these factors, and keep them in mind each time they fill their tanks. Reference California Energy Commission, Media and public communications office, (1994-2005), page updated 03/17/2005 Retrieved 05/19/2005 from http: web q- and-a. html Energy Information Administration, (2003) California gasoline price study: preliminary findings, Retrieved 5/04/2005 from web gas / petroleum /feature articles/2003/ca gasoline / ca gasoline. pdf Specialized Information Services, A primer on gasoline prices, publication number DOE / EIA-X 040, (released June 2004), Retrieved 5/04/2005 from web gas / primer /primer. htmSpeir, Robert A, Investigation into the current run-up in gasoline, (2004-2005) Retrieved 5/18/2005 from web.