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Q: How Are Gas Prices Determined?

Cost of crude oil is biggest impact on pump price

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    NEWSLETTERS

    The rise in gas prices has many scratching their heads, wondering how prices are determined.

    The U.S. Department of Energy explains that the price of gasoline is dependent on four major factors: Distribution and marketing, refining costs and profits, federal and state taxes, and crude oil prices.

    Crude oil prices have the largest effect on gas prices as that cost equals up to 68 percent of the per gallon cost in 2010. When crude oil prices go up, gas prices will quickly rise as well.

    Federal and state taxes are the next highest factor, making up 14 percent of the cost in 2010. Taxes fluctuate between states, with some, like California, charging additional “sales and use” taxes.

    Refining costs and profits account for roughly 7 percent of gasoline pricing in 2010. After Hurricane Katrina damaged refineries in the Gulf of Mexico, increased cost in refining causes an increase in prices.

    Distribution and marketing is the lowest slice of gas prices, averaging around 10 percent of the total cost. Since Texas is so close to much of the oil production and refinement, distribution costs are lower for the state, and help our prices to be lower than other regions.

    Within these four major factors, there are many reasons why gasoline prices fluctuate.

    Crude oil pricing is the most common reason prices rise. Foreign oil producers like the Organization of Petroleum Exporting Countries (OPEC) may adjust production due to political or economic reasons. Even domestic suppliers are affected by the worldwide supply and demand for crude oil.

    Demand during summer months also causes prices to spike higher than other times of the year as more people are using more gas.

    For further information, the Department of Energy has set up a website that answers many questions on gasoline prices.

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