Across the United States, the cost of gas has been a hot topic of discussion lately as prices hit record highs. The national average is now at $ 5.00 per gallon and by the end of the summer, that number could rise to $ 6 per gallon, according to JPMorgan estimates. But before we can understand what is going on in the pump, it is important to first know what key factors are influencing gasoline prices. This graph, using data from the US Energy Information Administration (EIA), describes the main elements that affect gasoline prices, providing the corresponding effect of each factor on the price.

The Four Main Factors

According to the Ltd., there are four main factors that affect the price of gas:

Crude oil prices (54%) Refining costs (14%) Taxes (16%) Distribution and marketing costs (16%)

More than half the cost of filling your tank is affected by the price of crude oil. Meanwhile, the rest of the price on the pump is fairly evenly distributed between refining costs, marketing and distribution costs and taxes. Let’s look at each factor in more depth.

Crude oil prices

The most influential factor is the cost of crude oil, which is largely dictated by international supply and demand. Despite being the world’s largest oil producer, the United States remains a net importer of crude oil, with the majority coming from Canada, Mexico and Saudi Arabia. Due to America’s dependence on imports, US gas prices are heavily influenced by the global crude oil market. A number of geopolitical factors may influence the crude oil market, but one of the biggest influences is the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia. OPEC, founded in 1960, was created to fight US domination of the world oil market. OPEC sets production targets for its 13 member countries and historically, oil prices have been linked to changes in OPEC production. Today, OPEC countries are responsible for about 60% of international oil trade.

Refining costs

Oil must be refined into gasoline in order to be used by consumers, so the cost of refining is included in the price of gas. The US has hundreds of refineries across the country. The country’s largest refinery, owned by Saudi Aramco, processes about 607,000 barrels of oil a day. The exact cost of refining varies, depending on various factors, such as the type of crude oil used, the refining technology available at the refinery, and the gasoline requirements in specific parts of the country. In general, refining capacity in the US is not in line with oil demand. Many refineries closed throughout the pandemic, but even before COVID-19, US refining capacity fell short of demand. It is unbelievable that no brand new refineries have been built in the country since 1977.

Taxes

In the US, taxes also play a crucial role in determining the price of gas. Across America, the average gasoline tax is $ 0.57 per gallon, however, the exact amount varies from state to state. Here’s a look at the top five states with the highest gas taxes: RankStateGas Tax (per Gallon) 1California $ 0.87 2Illinois $ 0.78 3Pennsylvania 0.77 $ 4Hawaii 0.77 $ 5New Jersey $ 0.69

  • Note: Figures include state and federal tax Countries with high gas taxes usually spend the extra money on improvements to their infrastructure or local transport. Illinois, for example, doubled its gas taxes in 2019 as part of a $ 45 billion infrastructure plan. California, the state with the highest gas tax, expects to see interest rates rise this July, which will raise gas prices by about three cents per gallon.

Distribution and marketing costs

Finally, distribution and marketing costs have an impact on the price of gas. Gasoline is usually shipped from refineries to local terminals via pipelines. From there, the gasoline is further processed to ensure that it meets market requirements or local government standards. The gas stations then distribute the final product to the consumer. The cost of running a gas station varies — some are owned and operated by branded refineries such as Chevron, while others are smaller businesses owned by independent dealers. Brands display a lot of ads. According to Morning Consult, Chevron, BP PLC, Exxon Mobil Corp. and Royal Dutch Shell PLC changed US television commercials more than 44,495 times between June 1, 2020 and August 31, 2021.

How does the Russia-Ukraine conflict affect US gas prices?

If only a fraction of America’s oil comes from Russia, why is the Russia-Ukraine conflict affecting US prices? Because oil is bought and sold in a global commodity market. So when countries imposed sanctions on Russian oil, it squeezed global supply, which eventually pushed up prices. This supply shock could keep prices high for a while, unless the US falls into recession, which is a growing possibility given the recent data trend.