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Please note this is a lengthly read but very educational

The Truth about Gasoline 101.

Gasoline; is the bloodline that keeps America moving. Our personal vehicles alone guzzle 140 billion gallons of gasoline and diesel fuel each year, up 3.2 percent from a year ago.

Tracking gas prices can feel like a roller coaster ride. They're down a little one month, up the next, before shooting up more than 50 percent in a year. Plus, they're different depending on where you look. Other countries, and even other states and cities, can have very different gas prices from your local Gas-N-Go. To the average person, it probably seems as though there's little rhyme or reason to how gas prices are determined. In this article, we will look at the forces that impact the price of gas at the pump, and we'll find out where your gas money actually goes.

Americans have an insatiable thirst for gasoline, and with sport-utility vehicles (SUVs) continually growing in popularity we are only getting thirstier. Just look at the roads and highways and you'll see that a severe gas shortage would practically cripple the country. Americans drive more than 2.5 trillion miles per year in automobiles, light trucks and SUVs, according to a MEMA report. That's equal to 14,000 round trips to the sun. Today, we drive almost twice as much as we did in 1980 (1.5 trillion miles).

The United States consumes an average of 20 million barrels of oil per day (bbl/d, according to the Department of Energy. Of that, about 45 percent is used for motor gasoline. The rest is used for distillate fuel oil, jet fuel, residual fuel and other oils. Each barrel of oil contains 42 gallons (159 L), which yields 19 to 20 gallons (75 L) of gasoline. So, in the United States, something like 178 million gallons of gasoline is consumed every day.

Typically, the demand for gas spikes during the summer, when lots of people go on vacation. Holidays like Memorial Day and the Fourth of July create logjams of tourist traffic during the summer. This high demand usually translates into higher gasoline prices, although that's not always the case. For instance, while gas prices soared 31 cents in April and early May of 2001, reaching $1.71 per gallon (which now seems inexpensive compared to today's prices), prices actually declined during the 2001 summer.

In 2004, prices continued to rise past the end of the summer travel season for a variety of reasons, including several hurricanes and an increase in the price of crude oil. And in 2005, Hurricane Katrina (along with a sizeable increase in crude oil prices) pushed prices to $3.07 per gallon on September 5, 2005. Prices settled down somewhat in November and December of 2005. But now the numbers are climbing again, with an average price for regular unleaded gas at $3.56 right now (April 21, 2008), an all-time high.

Price increases generally occur when the world crude-oil market tightens and lowers inventories. We will discuss who controls the crude-oil market later. Also, growing demand can sometimes outpace refinery capacity. In the spring, refineries perform maintenance, which can place a pinch on the gasoline market. By the end of May, refineries are usually back to full capacity.

Breakdown of Gas Prices

Historical Gas Prices
(Adjusted for inflation)
Year Price Per Gallon 1950 $1.91 1955 $1.85 1960 $1.79 1965 $1.68 1970 $1.59 1975 $1.80 1980 $2.59 1985 $1.90 1990 $1.51 1995 $1.28 2001 $1.66 2002 $1.31 2003 $1.52 2004 $1.79 2005 $2.28 2006 $3.03 2008 (so far) $3.56 Source: U.S. DOE

When you pump $20 dollars into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil, but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all of these entities have to get their slice of the pie.

 

 

Let's look at where your money goes when you pay for gas:

 

• Crude oil - The biggest portion of the cost of gas -- as of April 2008, that's about 50 percent -- goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $37 per barrel (1 barrel = 42 gallons or 159.6 L) in 2004 (Source: U.S. DOE). And, after Hurricane Katrina, some prices were  double that. In April 2008, crude-oil prices averaged around $100 per barrel (1 barrel = 45 gallons or 159.6 L).

 

 

Sometimes, gas prices go up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no one actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S., have to undergo costly retooling to handle it.

 

• Refining costs - The refining of crude oil makes up about 28 percent of the price of gasoline. To learn more about oil refining, read How Oil Refining Works.

   

• Distribution and marketing - Crude oil is transported to refineries, and gasoline is shipped from the refineries to distribution points and then to gas stations. The price of transportation is passed along to the consumer. Marketing the brand of the oil company is also added into the cost of the gasoline you buy. Together, these two factors account for about 8 percent of the price of gasoline.

   

• Taxes - Taxes, including federal and local, account for about 14 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 18.2 cents per gallon. There may also be some additional taxes, such as applicable state sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Add that to the state excise taxes, and it can average 27.4 cents. It could be worse. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6.65 per liter, theres 4 liters to a gallon with 78 percent of that going to taxes.

   

• Station markup - While it isn't represented in the diagram above, of course some of the actual money you spend at the pump does go to the service station. Service stations add on a few cents per gallon. There's no set standard for how much gas stations add on to the price. Some may add just a couple of cents, while others may add as much as a dime or more. However, some states have markup laws prohibiting stations from charging less than a certain percentage over invoice from the wholesaler. These laws are designed to protect small, individually-owned gas stations from being driven out of business by large chains who can afford to slash prices at select locations.

Gas prices also vary from state to state for several reasons. Taxes are probably the biggest factor in the different prices around the country. Additionally, competition among local gas stations can drive prices down. Distance from the oil refineries can also affect prices -- stations closer to the Gulf of Mexico, where many oil refineries are located, have lower gas prices due to lower transportation costs. There are also some regional factors that can affect prices.

World events, wars and weather can also raise prices. Anything that affects any part of the process, from the moment the oil is drilled, through refining and distribution to your car will result in a change in price. Military conflicts in parts of the world with lots of oil supplies can make it difficult for oil companies to drill and ship crude oil. Hurricanes have damaged offshore drilling platforms, coastal refineries and shipping ports that receive oil tankers. If a tanker itself is lost or damaged, or leaks its oil into the ocean, that will put a dent in the market as well.

The most recent surge in gas prices is due to several factors, including all of those listed above. However, a new reason emerged during the spring of 2007: legislation out of Washington to incorporate more ethanol into transportation fuels. There has been a call for enough increase in ethanol production to reduce daily oil imports by 1.5 million barrels by 2017. As the ethanol production increased refineries couldn't keep up the demand and had to import more oil. This added to the increase in price.

Unfortunately, the rise in prices may not be over. Several things could happen to keep driving up the price of gasoline: continuing tensions over Iran's nuclear talks, worse conditions in Nigeria or another active and devastating hurricane season [Source: The Washington Times].

OPEC and Gas Prices Around the World

The single largest entity impacting the world's oil supplies is the Organization of the Petroleum Exporting Countries (OPEC), a consortium of 12 countries: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Together, these 12 nations are responsible for 40 percent of the world's oil production and hold two-thirds of the world's oil reserves, according to the Energy Information Administration (EIA). When OPEC wants to raise the price of crude oil, it simply reduces production. This causes gasoline prices to jump because of the short supply, but also because of the possibility of future reductions. When oil production dips, gas companies get nervous. The mere threat of oil reductions can raise gas prices.

In April 2001, OPEC decided to reduce its collective production by one million barrels per day. This was at the same time that American consumers saw gas prices rise, hitting an average high of $1.71 per gallon on May 14, 2001.

OPEC last increased its production in June 2005, when it raised to 28 million barrels per day with an increase of 500,000 barrels per day "should oil prices remain at current levels or continue to rise further." In September 2005, it made all of its member countries' "spare output" available, an estimated 2 million barrels per day. However, in November 2006, OPEC again reduced its rate of production by 1.7 million barrels per day to keep the price from falling below $50 per barrel [Source: Joint Economic Committee ].

Beyond OPEC, there are several other countries that contribute to the world's crude-oil supplies, including the United States, Mexico, Canada, Equatorial Guinea, Russia and China. In March 2007, the United States imported from Canada approximately 2.297 million barrels of crude oil per day [Energy Information Administration]. OPEC tracks the oil production of these nations and then adjusts its own production to maintain its desired barrel price.

Cause and Effect
Numerous forces can influence the price of gas at the pump, but fuel costs are only one part in the vast web of global economics. Gas prices have an impact on other parts of the economy as well. You're already aware of the immediate effects of rising prices - that feeling of stunned disbelief as the numbers climb and climb while you fill your tank. There are secondary effects as well. You might decide against a long road trip because the gas would cost too much. When it comes time to buy a car, you might decide against a gas-guzzling SUV and find something with better mileage instead.

Let's look at the big picture. Does a hike in gas prices lead to inflation in the overall economy? It could, as long as the increase is a steady, long-term rise in prices. Expensive gas means it's expensive to ship products by truck, expensive to drive long distances and expensive to fly in airplanes. All those costs mean the cost of virtually any product you can think of will go up if gas prices stay high.

Domestic Supplies

After seeing how much oil the United States imports, it may be surprising to know that the United States is the world's third largest producer of crude oil. The biggest production region is around the Gulf of Mexico, and the largest producing state is Texas. The Gulf Coast region is home to two important producing areas: the Permian Basin, located in west-central Texas and eastern New Mexico, and the federal offshore portion of the Gulf. Other big oil-producing states include Alaska, Louisiana, California, Oklahoma and Arizona.

Even with the United States producing so much oil, it is still heavily dependent on foreign sources. It's that dependence that crippled the country during the oil embargo of 1973 and 1974. To make sure that this situation never happens again, the federal government formed the Strategic Petroleum Reserve (SPR). While most domestic oil is sent directly to refineries and then to the consumer market, some of it is held back and sent to the SPR.

As of May 24, 2007, the SPR stores about 690 million barrels of oil in underground salt caverns along the Gulf of Mexico [Source: Department of Energy]. Given that the United States imports about half of its oil, the Strategic Petroleum Reserve holds about a 60-day supply of oil if all imports were suddenly and totally cut off.  We would look like a Mad Max Movie, hording fuel & food. Becoming nomads searching for that promised Utopia..

Dispite our own opinions of why gas is what it is, this should  fully explain the reasons.! 

Now you know.... the rest of the story.