Crude oil price is the biggest contributor to gas prices in the US and around the world. Other factors like disruptions in supply lines, oil production levels, refinery costs, and federal taxes are major factors as well.
Although gas prices have fallen slightly, we’re unlikely to see a rebound of gas prices to the levels seen a couple of years ago.
What Factors into Gas Prices?
The average gas price across the US is around $3.71 per gallon after crossing the staggering $5.00 mark a few months ago.
Before you compare gasoline and petroleum prices, understand what goes into gas prices. Unlike the common notion, the crude oil price is not the only factor, although it remains the most significant one.
Crude Oil
The production levels and capacity of crude oil along with the demand-supply rule determine the crude oil price globally.
It is affected by many factors like the refinery capacity, storage capacity, distance from the production origin, and so on.
Crude oil accounts for roughly 54% of the retail gasoline price in the US currently.
Federal and State Taxes
The second-largest chunk of retail gasoline price goes to the state and federal taxes. Currently, the state and federal taxes in the US account for nearly 17% of the total price.
Refining Costs
Then, the refinery costs play a major role in determining the total cost of gasoline prices. These costs depend on technology availability, operating profit, labor costs, and so on.
Profit
Refinery companies and petroleum distribution companies keep a portion of the profit in the total price of these products. These companies must follow regulatory instructions to adjust a percentage of a profit above the total cost.
Marketing and Distribution Costs
Then, the marketing and distribution costs play a crucial role as well. If the oil is transported through pipelines, the distribution costs will be cheaper as compared to road or rail transportation costs.
The elements of gasoline price. Image Source: US Energy Information Administration (EIA)
Why are Gas Prices High Globally?
Along with the ingredients of gasoline, several global and domestic factors affect its prices globally.
The Demand-Supply Rule
Growing economies and populations around the world see an increased oil demand historically. When the oil demand exceeds supply globally, the prices increase and vice versa.
This simple yet important demand-supply rule dictates the oil prices worldwide. For instance, during the Covid-19 pandemic years, the oil demand reduced substantially and oil prices even went negative.
Crude Oil Production
The US is the largest crude oil producer in the world along with Saudi Arabia, Russia, and Canada.
Around 40% of the total crude oil production comes from the Organization of the Petroleum Exporting Countries (OPEC) nations. These countries remain the largest crude oil exporters as well.
Therefore, crude oil production and supply levels are dominated by OPEC as well as other major producers like the US, Canada, and China.
Wars and Political Reasons
As we have seen in recent months, Russia’s invasion of Ukraine has disrupted global trade supplies including crude oil.
The European Union countries heavily depend on crude oil supplies from Russia. Wars and political factors affect the supply lines affecting crude oil prices globally and not just in the EU region.
Refinery and Storage Constraints
Even if the OPEC and Non-OPEC courtiers start producing more crude oil, there will be not sufficient storage and refinery capacities around the world.
Most growing economies like China and India depend on regular oil supplies and consistent refinery levels.
Major consumers of oil products including the US have also storage and refinery constraints. Oil companies remain reluctant to invest more to increase storage facilities and many have shut down in the last two years due to Covid-19 as well.
A few months ago the price of gas was higher than $5.00. It has since fallen back to an average of around $3.71 per gallon.
Where are Gas Prices Headed?
Gas prices are going to dip further in the short term. However, due to the prolonged Ukraine-Russia conflict, upcoming economic recession, increased inflation rate, and other factors, gas prices in the US will likely surge again.
Goldman Sachs predicts gas prices could soon hit the $4.35 mark again. However, the US Energy Information Administration (EIA) predicts lower prices for the Q4 of 2022 and the year 2023 on average.
The EIA estimates the average gas price to remain around $3.98 for Q4 of 2022 and an average annual price of $3.61 for the year 2023.
What the US Government Can Do About Rising Gas Prices?
Unlike the common notion, there is very little that the US government can do to fix gas prices. As mentioned above, the key factors affecting gas prices are not controlled by the US government.
Despite President Biden’s call for a three-month tax holiday for gas products, economists think it will have little to no effect on gas prices in the long run.
One of the main reasons is the cost-benefit of a temporary tax cut resulting in the rising demand for gas as well as decreased revenue for the government in the long term.
How Can I Save on Gas Prices?
Gas prices may vary by state in the US. Several factors including oil transportation costs, state taxes, and regulatory requirements affect gas prices.
You can search for the lowest gas prices using mobile apps, Google search, and online price trackers as well. Following a few simple tips can save you a handsome amount on gas fillings annually if you drive regularly.
Use Reward Programs
Most gas stations offer cashback or reward points to their loyal customers. For instance, the Exxon Mobil Rewards+™ program offers 100 reward points on every $1 spent through its filling stations and qualified purchases.
Similarly, look for reward programs offered by large retailers like Target and Walmart. Converting these points for gas purchases can effectively save you anything between 1-3%.
Use Credit Cards with Gas Reward Points
You can save more on gas prices when you use a credit card with a good reward points program. While there is no one-fits-all credit card, you can search and compare different options.
Depending on your credit profile, you may qualify for a credit card with an increased limit as well as a high-tier rewards program.
Shift to Hybrid Vehicles
As gas prices increase in the US and worldwide, we see a surge in the shift to renewable energy. Consumers start buying electric vehicles (EVs) and use public transport more frequently.
If you can afford a hybrid vehicle, you can save on energy costs. EVs are generally more fuel-efficient and lower your total energy costs.
Drive Carefully
Driving carefully means avoiding aggressive driving, idle starts, sudden brakes, and other techniques. Following these simple tips can help you save gas costs in the long run effectively.
Maintain Your Vehicle
A basic but effective tip is to look after your vehicle. Keep your vehicle engine in good shape to improve fuel efficiency.
Similarly, taking care of your vehicle tires, load, engine oil, etc. Means more fuel savings in the long run.
