As I was pumping $5.96 per-gallon diesel into my pickup’s tank the other day, I marveled at how quickly the dollar digits raced by, on the pump’s display. I began to ponder what costs go into each gallon of fuel. This sent me off on a web-wandering search for some relevant data on what drives fuel prices. Most of that can be summed up in one word: Government.
Liquid fuels are some of the most highly regulated and heavily taxed commodities in the world. The reasons for this are obvious: They are highly concentrated forms of potential energy. Think of them like liquid gold or liquid dynamite. They have the power to accomplish great things. Whoever controls these fuels — and the commerce in them — effectively controls modern society. And of course, governments like to control nearly every aspect of our lives. So by controlling fuel, starting from leases and drilling through refining and distribution all the way to your local pump, they assert their control and extract their multiple “pieces of the action.” Ah, the Mafia must be envious!
Taxes
The amount of tax — state and Federal, combined — that is tacked on to each gallon of fuel is now more than the 49 cents per gallon that I was paying for fuel at the pump en toto, back when I was in high school. The magnitude of that accumulation of taxes seems both absurd and obscene to me. These tax increases were added gradually, so they largely went unnoticed by the Generally Dumb Public (GDP). As always, the GDP remains oblivious to what drives prices, the full extent of taxation, and even the nature of money itself.
According to the American Petroleum Institute:
“The federal excise tax is 18.4 cents per gallon (cpg), and state gasoline fees and taxes range from a low of about 15 cpg in Alaska to as much as 68 cpg in California and around 59 cpg in Illinois and Pennsylvania. On average, state taxes and fees average about 39 cpg and when combined with federal taxes average 57 cpg at the pump. Sales taxes along with taxes applied by local and municipal governments also can add to gasoline prices in some locations.”
But it is not just these direct taxes that fuel the price of fuel. There are also indirect taxes and various fees and fines, including corporate profit taxes, inventory taxes, taxes on the sales of capital equipment, and even taxes on the electricity used to run the pipelines and refineries. These taxes all add up! Now, let’s consider some other costs:
Production costs
Production costs include the expense of drilling, but even before that comes the costs of exploration, permits, environmental studies, and so forth. Then there’s the lease: That is paying for the privilege of taking a gamble on getting a lease on a piece of land to drill on. A lease on public drilling land is another form of tax. Then there are the costs of the drilling rigs themselves and labor costs for the drilling crews, and of course insurance… lots of insurance: Liability insurance is enormously expensive, given the mess crested if there is ever an accidental spill. Then there is insurance on the equipment. And Workmen’s Compensation Insurance, and so forth and so on. Again, all of these add up.
The oil refineries have enormous costs, which also include regulatory costs. (See below.)
Transportation costs
Next, there are transportation costs for the vast network of crude oil and natural gas pipelines. Those require a lot of money for maintenance and monitoring. If you’ve ever traveled through oil country, then you’ve undoubtedly seen the fleets of white pickup trucks. You see them everywhere. Some of these trucks belong to the oil companies themselves. But most of them belong to the legions of oilfield service companies, such as Halliburton, Schlumberger, Saipem, Weatherford, and Baker Hughes. Some of those oilfield service technicians maintain the equipment at the wellheads and all up and down the pipeline infrastructure. But others are there just to meet OSHA and EPA requirements, for various safety checks. Some of those guys are out there counting ducks, for the US Fish and Wildlife Service.
As refined fuels leave the refineries, there is another set of pipeline infrastructure, that is even more heavily regulated than those for piping crude oil. The higher volatility of refined fuels means even more scrupulous health and safety inspection, and higher security, and on and on. Next comes distribution, by rail or by truck. Those have their own sets of costs and regulations.
Regulatory costs
One aspect of fuel production that you might not have considered is the cost of regulation. There are armies of petrochemical engineers, safety engineers, and report writers, whose main job is checking off regulatory boxes. There are geologists, environmental safety specialists, worker safety specialists, wildlife biologists, and umpteen other experts and worker bees who are all on the oil company payroll — or subcontracted out — just making sure that all of the regulations are met, and the meetings attended, and the umpteen reports are dutifully filed — all to stay on the right side of The Regulators.
Then there is that annual pump calibration tax stamp, on your gas station’s fuel pump. That is one last little Piece of the Action that must be paid to your state government, before you can fill up your tank.
In all, the level of regulation and taxation in the liquid fuel industry is just astounding.
Inflation
In the background, quietly and insidiously, is the hidden tax of inflation. Year in and year out, inflation is always there, nibbling away, cutting into profitability and savings. When the currency unit itself is self-destructing, then everything denominated in that currency is also under La Mordida — “The Bite.”) Presently, inflation is about 15%, annually. (Officially, it is 9.1%, but everyone knows how bureaucrats fiddle with their figures.) So, on top of all of the other taxes, there is this hidden tax of inflation that affects everyone in the fuel production and distribution chain, right down to you — the guy squeezing the fuel pump handle. Inflation is robbery in slow motion, and we are all getting robbed. The beneficiary of inflation, not surprisingly, is the government that sees its debts easier to repay, from tax receipts that keep growing, and tax brackets that keep creeping upward. Most people have not thought through the long-term effects of bracket creep: In the unfolding era of mass inflation, we will all become “millionaires” (on paper), and eventually, we will all be taxed at the top bracket. But a gallon of gas or a gallon of milk may cost you $25. We’ll be starving millionaires.
The Bottom Line
So, to get back to my $5.96 per-gallon diesel cost… How much of that goes to the government (directly or indirectly), how much goes to general overhead costs, and how much of it goes to profit and then thence paid to the shareholders of the oil companies?
In my estimation, here is the math on $5.96 per gallon, for diesel fuel:
- General production, transportation, and overhead costs: $4.50 per gallon
- The governments’ various Pieces of the Action: $1.25 per gallon
- Gas station profit: 12 cents per gallon.
- Oil company profit: 11 cents per gallon.
So, ponder then, how the government makes ten times as much as the oil companies, but then has the temerity to complain about “high profits” earned by the oil companies. – JWR
FAQs
What makes up the price of a gallon of gasoline? ›
The primary factors impacting gasoline prices are global crude oil cost (61%), refining costs (14%), distribution and marketing costs (11%) and federal & state taxes (14%), which are generally reflected in the wholesale costs that gasoline retailers pay to distributors.
What is the price difference between diesel and gasoline? ›Currently, with cheaper fuel prices, diesel is typically 25 to 50 cents more per gallon than gasoline. Another benefit of gasoline is availability; there are certain areas where stations do not necessarily have a diesel pump.
What is the biggest factor in the price of a gallon of gasoline? ›The cost of crude oil is the largest factor in the retail price of gasoline. Because of this, changes in the retail price of gasoline typically track changes in the global crude oil price.
How does the price of gasoline affect the economy? ›These higher energy prices seep into almost every major part of the economy. They drive up the costs for electricity, transportation, shipping, logistics, air travel, agriculture, fertilizer and the production of other commodities.
How much profit do oil companies make in a gallon of gas 2022? ›The markup on a gallon of gas averages 30 cents and after expenses, especially credit card fees which can be 10 cents or more per gallon, retailers have net profits of around 10 cents a gallon.
How much profit does a gas station make on a gallon of gas? ›This puts the net profit margin of a gas station at less than two percent. For reference, the banking industry has roughly 30% net profit margins. Like all industries, the retail fuels industry goes through regular high and low-margin periods.
Why is diesel higher price than gasoline? ›There are three primary reasons for the price discrepancy: the transition to cleaner diesel blends, higher state and federal taxes, and diesel's supply and demand.
Why is diesel cheaper than gas? ›Initially thought of as a more economical alternative because of the better miles-per-gallon it produces, diesel was favoured by motorists looking to save money. The price of a gallon of diesel was cheaper than gasoline too.
How many more miles per gallon does a diesel get? ›According to the U.S. Department ofEnergy, diesel powered vehicles can go 20% to 30% more on a gallon than gas engines. Even customers have reported receiving an average of 4 to 5 miles more per gallon with a diesel engine than a gas powered truck.
Do gas prices cause inflation? ›Crude oil is a major economic input, so a rise in oil prices contributes to inflation, which measures the overall rate of price increases across the economy. Inflation as measured by the annual gain in the U.S. Consumer Price Index (CPI) set a 40-year high in March 2022 amid COVID-19 supply disruptions.
What causes gas prices to rise? ›
Gasoline prices tend to increase when the available supply of gasoline decreases relative to real or expected gasoline demand or consumption. Gasoline prices can change rapidly if something disrupts crude oil supplies, refinery operations, or gasoline pipeline deliveries.
What factors affect gas prices? ›- The cost of crude oil.
- Refining costs and profits.
- Distribution and marketing costs and profits.
- Taxes.
This increase is because the energy price cap, set by energy regulator Ofgem , is set to jump by 80 per cent to reflect rising wholesale energy costs for energy suppliers.
How much crude oil does it take to make a gallon of gasoline? ›Refineries in the United States produce about 19 to 20 gallons of motor vehicle gasoline for every 42-gallon barrel of crude oil.
Where does the money from a gallon of gas go? ›Most of your gas money goes directly to oil companies
Of the remainder, 14 percent of the money spent on gasoline goes to taxes that help pay for roads and transportation services, 10 percent to refining costs, and 8 percent to distribution and marketing.
As to why they weren't drilling more, oil executives blamed Wall Street. Nearly 60% cited "investor pressure to maintain capital discipline" as the primary reason oil companies weren't drilling more despite skyrocketing prices, according to the Dallas Fed survey.
Who makes money on a gallon of gas? ›Someone does “make” $2 a gallon on gas sales: the oil producer. The cost of oil is usually at least half the price of a gallon of gas. On the day I am writing this, gas prices are $3.41 and oil prices are a bit more than $84 per barrel.
Who makes money from high gas prices? ›Major Western oil companies reported record profits in the second quarter alongside gas prices that have topped a national average of more than $5 a gallon. ExxonMobil, Chevron and Shell posted a combined $46 billion in earnings for the second quarter, according to earnings statements from the three companies.
Does owning a gas station make money? ›Did you know: A successful gas station owner can make anywhere from $40,000 to $100,000 or more annually? Owners of gas stations that do more than sell gasoline earn more money because the profit margins of the other things they sell are high.
Do gas station owners make money? ›Station owners make most of their profits in their stores, on sales of food and drinks, as well as alcohol where sales are legal. “The idea is to have a very competitive gas price, and when they go in the store, you can make money off that transaction,” Lenard said.
How many gallons of gas does a barrel of oil make? ›
Petroleum refineries in the United States produce about 19 to 20 gallons of motor gasoline and 11 to 12 gallons of ultra-low sulfur distillate fuel oil (most of which is sold as diesel fuel and in several states as heating oil) from one 42-gallon barrel of crude oil.
Does the government control the price of gas? ›It's that they have very little control over it. Yes, policies and legislation can certainly play a role, but gas prices are largely dictated by oil prices and oil prices are dependent upon supply and demand.
How much oil does it take to make a gallon of gas? ›Refineries in the United States produce about 19 to 20 gallons of motor vehicle gasoline for every 42-gallon barrel of crude oil.
How do gas prices work for dummies? ›Fact is, gas prices are based on a combination of monetary and fiscal details: the price of crude oil, taxes, refining costs, and distribution costs. The Energy Information Administration describes these pricing components as follows: Taxes: the monthly national average of federal and state taxes applied to gasoline.
What factors affect gas prices? ›The four main factors that affect gas prices
Crude oil prices (54%) Refining costs (14%) Taxes (16%) Distribution, and marketing costs (16%)
Probably the single biggest influencer of oil prices is OPEC, made up of 13 countries (Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela); collectively, OPEC controls 40% of the world's supply of oil.
What is the reason for high gas prices? ›Monthly input costs for a gallon of regular gasoline, U.S. average. The rising cost of oil is the most significant driver of gas prices.
What causes gas prices to rise? ›Gasoline prices tend to increase when the available supply of gasoline decreases relative to real or expected gasoline demand or consumption. Gasoline prices can change rapidly if something disrupts crude oil supplies, refinery operations, or gasoline pipeline deliveries.
Where does the US get most of its oil? ›- The top five sources of U.S. total petroleum (including crude oil) imports by percentage share of total petroleum imports in 2021 were:
- Canada51%
- Mexico8%
- Russia8%
- Saudi Arabia5%
- Colombia2%
The top five source countries of U.S. gross petroleum imports in 2021 were Canada, Mexico, Russia, Saudi Arabia, and Colombia. Note: Ranking in the table is based on gross imports by country of origin. Net import volumes in the table may not equal gross imports minus exports because of independent rounding of data.
What is the price of 1 barrel of oil? ›
Live interactive chart of West Texas Intermediate (WTI or NYMEX) crude oil prices per barrel. The current price of WTI crude oil as of October 19, 2022 is 85.55 per barrel.
What does the 9 10 mean at gas stations? ›The practice of tacking 9/10 of a cent on the end of a gas price goes back to when gas cost only pennies per gallon and was a tax imposed by state and federal governments. Gas stations added the fraction of a cent on the end of the price instead of rounding up the price.
How do gas stations know to change prices? ›The U.S. EIA website states: "Gasoline prices can change rapidly if something disrupts crude oil supplies, refinery operations, or gasoline pipeline deliveries. Even when crude oil prices are stable, gasoline prices fluctuate because of seasonal changes in demand and in gasoline specifications."
Who sets the price of oil per barrel? ›The price of oil is set in the global marketplace. Oil is traded globally and can move from one market to another easily by ship, pipeline, or barge. As a result, the supply/demand balance determines the price for crude oil around the world.