The cost of crude oil is the largest component of the retail price of gasoline, and the cost of crude oil as a share of the retail gasoline price varies over time and across regions of the country. Many factors affect crude oil prices; learn about seven major factors that influence crude oil prices in What Drives Crude Oil Prices? Increases in U.S. oil production in the past several years have helped reduce upward pressure on oil and gasoline prices.

Oil Prices: The Crude Reality

Crude oil is the raw commodity used to make gasoline, so crude oil prices play the most important role in setting gasoline prices. According to the U.S. Energy Information Administration, the price of crude oil accounted for 56% of the price of gasoline in the decade through 2020, on average. But that average conceals wide fluctuations. In 2020, with crude prices down sharply amid the COVID-19 pandemic, crude accounted for just 43% of gasoline costs.

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. Even when crude oil prices are stable, gasoline prices fluctuate because of seasonal changes in demand and in gasoline specifications.

Taxes add to the price of gasoline

Federal, state, and local government taxes also contribute to the retail price of gasoline. The federal tax on motor gasoline is 18.40 cents per gallon, which includes an excise tax of 18.30 cents per gallon and the federal Leaking Underground Storage Tank fee of 0.1 cents per gallon. As of January 1, 2022, total state taxes and fees on gasoline averaged 31.02 cents per gallon. Sales taxes along with taxes applied by local and municipal governments can have a significant impact on the price of gasoline in some locations.

Quality of Oil

The quality of the oil affects its price. Higher quality crude oil is easier to refine and meet environmental requirements. You may have heard of this higher quality oil referred to as ‘sweet crude.’

Speculation

Speculation gets a lot of the blame for the high gas prices we all face.  Experts disagree on how much speculation affects the price of gas and oil. But the trading of oil futures certainly has an effect.

Demand for Oil

Like other industries, the demand for crude oil affects overall pricing. Demand for oil continues to grow globally, particularly for transportation needs. China, India, and other countries are seeing increasing numbers of vehicles on the road due to an expanding middle class. More vehicles on the road means those countries will consume more gasoline, which increases demands for crude oil.

Economic Growth

As the economy grows, so does the price of natural gas. In a strong economy that shows good growth, particularly in industrial and commercial markets, demand for this resource spikes. Companies experience an increase in demand for their goods and services, which in turn raises the want level on natural gas as a power source. As more economic sectors demand natural gas, the price invariably increases. A variety of industries use natural gas that consumers may not realize.

Natural Gas Storage

The cost of maintaining storage facilities for natural gas can influence its end price for the consumer. Known as storage levels, these underground field locations are a key link in the supply chain for delivering natural gas to utility companies, businesses, and homes throughout the year. An uptick in fees associated with storage levels can cause a corresponding increase in natural gas prices. Supply and demand also influence storage needs. Lower demand for natural gas means more time in storage, which causes costs associated with maintaining storage levels to rise. 

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