Envisioning the imminent change in global economic power (2006-2036p)

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What drives gas prices up?

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Gas costs have been a hot topic of conversation in the United States of late as prices have hit record highs.

The national average is now $5.00 a gallon, and by the end of the summer that number could rise. $6 per gallonAccording to JP Morgan estimates.

But before we can understand what’s happening at the pump, it’s important to first understand what are the key factors affecting gas prices.

This chart, using data from the US Energy Information Administration (EIA), outlines the main components affecting gasoline prices, with each factor having a proportional impact on price.

four main factors

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

  • Crude Oil Prices (54%)
  • Refining Cost (14%)
  • Tax (16%)
  • Sales and marketing expenses (16%)

More than half of the cost of filling up is influenced by the price of crude oil. Meanwhile, the rest of the price at the pump is split equally between refining costs, marketing and distribution, and taxes.

Let’s take a closer look at each factor.

crude oil prices

The most influential factor is the cost of crude oil, which is largely determined by international supply and demand.

Despite being the world’s largest oil producer, the US remains a net importer of crude oil, with the bulk 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.

Several geopolitical factors can affect the crude oil market, but one of the biggest influencers is the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia.

OPEC was formed in 1960 to counter US dominance in the global oil market. OPEC sets production targets for its 13 member countries, and historically, oil prices have been linked to changes in OPEC production. Today, about 60% of the oil traded internationally is in the OPEC countries.

finishing costs

The oil has to be refined into gasoline before consumers can use it, which is why the cost of refining is included in the price of gas.

America has hundreds of refineries across the country. The country’s largest refinery, owned by Saudi Arabian company Saudi Aramco, processes about 607,000 barrels of oil per day.

The exact refinery costs depend on several factors, such as: B. the type of crude oil used, the processing technology available at the refinery, and the demand for gasoline in certain parts of the country.

In general, US refining capacity has not kept pace with oil demand. Many refineries were shutting down during the pandemic, but even before COVID-19, US refining capacity was lagging behind demand. Incredibly, no new refinery plants have been built in the country since 1977.

Steer

In the US, taxes also play an important role in determining the price of gas.

The average US gasoline tax is $0.57 per gallon, but the exact amount varies from state to state. Here’s a look at the five states with the highest gas taxes:

post Federal State Gas Tax (per gallon)
1 California $0.87
2 Illinois $0.78
3 Pennsylvania $0.77
4 airy $0.77
5 New Jersey $0.69

*Note: Figures include both state and federal taxes

States with higher gas taxes typically spend additional money on infrastructure or transit improvements. For example, Illinois doubled its gas taxes in 2019 as part of a $45 billion infrastructure plan.

California, the state with the highest gas tax, expects a rate hike this July, raising gas prices by about three cents a gallon.

Sales and Marketing Expenses

Finally, the sales and marketing costs affect the price of gas.

Gasoline is usually piped from refineries to local terminals. From there, the gasoline is further processed to ensure it meets market requirements or local government standards.

Gas stations then deliver the end product to the consumer. The cost of running a gas station varies – some gas stations are owned and operated by branded refineries like Chevron, while others are small operations owned by independent dealers.

Big brands run a lot of ads. According to Morning Consult, Chevron, BP plc, Exxon Mobil Corp and Royal Dutch Shell plc aired more than 44,495 television commercials between June 1, 2020 and August 31, 2021 in the United States.

How is the Russia-Ukraine conflict affecting US gas prices?

If only a fraction of US oil comes from Russia, why is the Russia-Ukraine conflict affecting US prices?

Because oil is bought and sold in the global commodity market. So when countries imposed sanctions on Russian oil, it put pressure on global supply, which ultimately caused prices to rise.

This supply shock could keep prices higher for some time until the US falls into recession, which is likely an increasing trend based on recent data trends.

source

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