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Why Does Gas Cost So Much?

2010-February-24
An increasing share of world energy consumptio...
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Why Does Gas Cost So Much?.

The Billion-Dollar Equation

Many factors contribute to the price of a gallon of gas. The good news is that, in general terms, the equation is simple. These are the four main components that determine the gas prices you and I pay:

Crude Oil + Refining Process + Retail Sales/Distribution + Taxes = Gas Price

These components, however, don’t contribute equally to the gas prices at the pump. Here’s a look at each component and its role in the retail pump price:

Crude oil — 57%

Finding the crude oil

Getting the crude oil out of the ground

Transporting the crude oil to the refinery

Maintaining a reserve capacity of crude oil

Profit

Refining the crude oil into gasoline — 18%

Producing special blends of gasoline to meet local clean air government regulations

Transporting the gasoline to the gas station

Profit

Selling the gasoline at a station — 11%

Operational costs

Marketing costs

Profit

Taxes, federal and state — 14%

Is raising fuel taxes further the right thing to do to encourage alternative energy sources?

No. Raising taxes will cause a non-market driven decrease in oil consumption. This decrease in demand will drive down the world price of oil, making it tougher for alternative energy sources to gain market share. Until alternative sources of energy are profitable to produce on an even playing field compared to gasoline, they won’t get to market on a large scale. Many energy experts do not support raising taxes because of this economic reality.

What about higher mandated fuel economy standards?

Robert Lutz, GM’s vice chairman, believes “if fuel efficiency is the goal, making it impossible for consumers to buy full-size trucks and SUVs because of mandated fuel economy standards won’t help. This will hurt the economy and decrease the demand for fuel, causing lower prices, thereby increasing demand (for fuel).”

Bob gets it. His point is that Americans should drive what they want until they decide the price of fuel is so important that it makes them choose a more efficient vehicle. If one assumes that gas prices will remain high, these elevated gas prices will encourage alternate energy development. Legislating larger vehicles out of existence isn’t the answer. Hey Washington, are you listening?

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