Breaking Down the Cost of a Gallon of Gas

Breaking Down the Cost of a Gallon of GasThe price of a gallon of gasoline ranged from $3.27 along the Gulf Coast, to $3.90 along the West Coast in November 2012; ever wonder how much of that goes to the government and how much goes to exploration and refining companies? Then there are the gas stations and oil traders looking to make a profit as well. Let’s look at the breakdown of who makes what, and also why prices vary across the country – sometimes drastically [for more gasoline news and analysis subscribe to our free newsletter].

Basic Breakdown

What you pay at the pump is dished out to multiple parties. Some make their cut at the beginning, such as “upstream” companies drilling for oil then sending it for refining. The refineries convert the product to gasoline and then it is transported. The gas is then marketed and ultimately sold to you by gas stations – all these parties are called “downstream.” How much of the pie the government and different sectors make varies depending on such factors as the price of crude oil and federal and state taxes. The below figure shows a basic breakdown of what percentage of your money goes where:

Downstream

Crude oil is the raw material for a gallon of gasoline, and greatly affects the price. U.S. Energy Information Administration (EIA) data indicates the cost of crude eats up about 62% of what you pay at the pump. If you pay $3.85 per gallon, $2.387 is attributed to the price of crude. This can vary greatly; Exxon has stated that up to 80% of the cost of gasoline comes from crude costs and between 2000 and 2003 crude only accounted for 35% to 50% of the cost at the pump.

Drilling and exploration companies benefit from higher crude prices, but how much they make varies widely. Since some of these companies are also involved in upstream activities (discussed next), their profits and costs are affected by those activities as well .

Companies like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), BP plc (NYSE:BP) and Anadarko Petroleum Corporation (NYSE:APC) have different costs depending on where they’re drilling and how easy the oil is to extract [see also Top 5 Global Oil Stocks by Market Cap].

Deep water drilling typically has a high cost to extract – upwards of $70/barrel. Unless the price of crude is higher than a company’s extraction cost, the project faces losses and puts the squeeze on profits for the drilling segment of the company. Some oil fields are easier to extract from, and therefore cost less (“easy oil” is becoming harder to find though). Reuters estimated in 2009 that the total cost to extract oil in Saudi Arabia to be between $4 and $6 per barrel.

Downstream companies are most affected by the price of crude and extraction costs. If these companies can’t extract oil for less than the current price of oil—set by global supply and demand and the financial markets—this puts a squeeze on profits and the companies’ share price. Easy oil and high crude oil prices make for larger profits and a greater chance of a rising share price. The profits these companies make are then taxed.

Upstream

Upstream production typically includes all companies that get gasoline to the pump after the extraction process. This includes refiners, transportation, distribution and marketing. Chevron, Exxon and BP are also involved in this aspect of the retail gasoline supply chain [see also The 5 Minute Guide To Gasoline ETFs].

Refining accounts for about 18% of the price at the pump. The companies mentioned above refine the raw product into a “car-ready” product. This costs money in the way of labor, equipment, transportation and the cost of other raw products needed for the process. Just like downstream segments of the company, refining is not always profitable. According to November and December 2011 EIA data, the market price for gasoline, coming out of the refineries, was less than what it cost refiners to get the crude oil.

Refiners, or the refining segment of companies such as BP, Chevron and Exxon are susceptible to crude oil prices as well as the retail price of gasoline – weak demand for gasoline, or too much gasoline supply drives down prices at the pump, and if that is not offset by lower crude prices then refiners’ profits are squeezed.

One major misconception is that when you go to an Exxon or Chevron gas station, the gas station is actually owned by the company on the pump. That’s not always the case. Both Chevron and Exxon only own about 5% (or less) of the gas stations with their name on them; the rest are owned by local retailers, according to Exxon’s website and Chevron financial statements.

Surprisingly, most of the profit for gas stations comes from the other products sold, and not gasoline. According to NACS Online, in 2009, the average mark-up per gallon of gas by the retailer was $.131 – but that is not all profit. After expenses, the gas station only makes about 1 or 2 cents per gallon sold.

Taxes

Thank the government for about 11% of your cost at the pump as of September of 2012 – although this varies greatly across the country. Federal taxes account for 18.4 cents per gallon, as of November, 2012. The local sales tax will also be included in the price when applicable. Each state also applies its own excise tax in the cost. California, for example, applies a tax of 35.4 cents per gallon – one of the highest in the country.

Total taxes are highest in New York, averaging 67.4 cents per liter as of January 1, 2012. Alaska and Wyoming had the least total tax per gallon at 26.4 and 32.4 cents, respectively [see also What You Need to Know About Commodity ETFs, ETNs, and Contango].

Taxes per gallon in 2012 are the lowest they have been in years due to a gradual tax decline. In 2000, taxes accounted for about 30% of your cost at the pump.

Price Variance Across the Country

Taxes play a significant role in the cost difference of a gallon of gas across the country as shown in the previous section. Political reasons also affect the price. California, for instance, wants to limit air pollution and therefore requires a higher grade gasoline to be sold than what is available in other parts of the country; this increases the cost.

While investors only see one crude oil price on the news – such as West Texas – there are multiple types of crude, each with a different price. Refiners in different areas of the country face different crude costs, depending on where the crude was extracted. This has a direct impact on refiner costs and ultimately prices at the pump [see also Crude Oil Guide: Brent Vs. WTI, What's The Difference?].

Oil Traders

Traders are sometimes blamed for high oil costs and pump prices. Unfortunately, it’s not that simple. Global supply and demand ultimately determines the price of crude and price at the pump, as well how much of the raw and refined products are in storage. While short-term sharp fluctuations in the crude market do occur due to panic or trader activity, the price won’t sustain itself at those levels unless there is a viable reason. Also, since there is a delay in the time it takes for crude to be pulled from ground, refined, and ultimately dished out at the pump, speculative oil traders can’t be blamed for pump price changes [see also 25 Ways To Invest In Crude Oil].

This article was originally written by Cory Mitchell, and posted on CommodityHQ.

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