What You Need to Know About Gas Prices
- Many factors affect the price of gas at the pump, from simple economics to government barriers that limit supply and increase prices.
- According to the latest Energy Information Administration data, the cost of crude oil accounts for the majority (54%) of the retail price of regular gasoline while refining makes up 18% and taxes make up 11%
- Understanding what goes into the price is critical to understanding energy and developing sound government policy
Key History
- Long before it got the nickname "black gold," crude oil was essentially worthless when it bubbled to the surface in Pennsylvania
- Human ingenuity through chemistry revealed that refined oil could lubricate equipment and light American homes and businesses
- Soon the oil fields boomed, and refineries popped up throughout the Northeast United States
- Not long thereafter, gasoline found its dance partner in the internal combustion engine
Crude Oil
- Geologists, chemists, and landmen have to locate and secure ownership of mineral rights to produce (extract) crude oil from deep under the earth.
- The United States is the top crude oil producer in the world at about 15% of the world's total crude oil production, but 85% of world's crude oil is produced outside the U.S.
Refining
- Crude oil is sold to a refiner
- Through refining, crude oil is manufactured into products like home heating oil, diesel, jet fuel, kerosene, and gasoline
- The United States has refining capacity of about 18 million barrels of oil per day
- Due to the COVID-19 pandemic; competitive pressures; and government regulations, American refineries-one of our most productive, competitive, and critical manufacturers-are threatened due to bad government policy
Gas Stations
- Fuel retailing is one of the most competitive price markets in the world with prices proclaimed on giant signs at street corners coast to coast
- For these retailers, margins are incredibly small compared to profits on items inside the store
- More than 60% of gas stations are owned by individuals or families who own only one station
- Fewer than 5% of stations are controlled by refiners
Conclusion
- Policymakers should appreciate all of this and remove barriers that limit supply.
- Increasing supply by allowing more leasing on government lands, allowing investment, improving efficiency by increasing pipeline capacity, and reducing regulations like the RFS will help to mitigate high gas prices for the American people.
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