Gas Prices 101

When you reach for a few bucks, or a card, or your Apple Pay –  ever wonder why that thing you’re buying costs this much, instead of that much?  Of course.  We all do.

Now, we can’t tell you the back story of your large latte, or that movie ticket, or a pair of Levis – but if you’re curious, we can tell you what’s behind the price at the pump, when you fill up your car.  Here goes:

Where does gasoline come from in the first place?

From under the ground.  Because gasoline is made from petroleum, or what they call in the trade, “crude oil”.  That crude oil is bought everywhere that oil is used (which IS everywhere) and sold in all the places where oil is found (not everywhere, but lots of places – from the U.S. and Mexico, to Saudi Arabia, Indonesia, Nigeria, Russia and more).

And why do they call it “crude” oil?

Think of “crude” as meaning “raw”.  That’s oil as it comes right out of the ground.  To use that oil, It has to be refined (which happens in refineries, which we’ll get to in a moment) – turned into products like gasoline.

So who decides how much crude oil costs?

Nobody, or more exactly, everybody.   That same barrel of oil used to make the gasoline for our cars – is used to make diesel fuel for trucks and ships (and cars) – to make jet fuel for our summer vacations and business trips – to make kerosene for rocket fuel – to make the chemicals that make everything from plastic wrap for our food to plastic parts for our cars (and phones and laptops and bikes and golf balls and…).

All that supply and demand for crude oil, accounts for almost 50 percent of the price of our gas.

And that’s it?

Nope.  There are taxes on gas (and diesel, if you’ve got that kind of car) – federal taxes, state taxes, local taxes.  If you’ve ever bought gas in the state next door, you’ve probably noticed those totals vary – but in general, taxes add up to about 19 percent of the cost at the pump.

Then there’s the cost of refining oil and turning into gasoline (which happens in those refineries we mentioned above).  Those are massive industrial plants – and the cost of the chemical magic that happens there, accounts for a little over 14 percent of the price of gas.

Then finally, that gasoline has to get from those refineries to us – which includes the cost of transporting the gas, and running the stations, which run the pumps, which is how finally, we get that gasoline.  That accounts for a chunk of the price too.

Now, if you want to see what all that looks like, here it is:

(And if you really want to get into the weeds, try the U.S. Energy Information Administration’s official account:  Gasoline Explained.)

Click here to read more about what’s new, what’s next and what it means for you.

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