11 Factors That Determine Gas Prices

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Everyone wants to know what really drives gas prices.Many blame speculators for the day-to-day volatility.

However, there are fundamental drivers of the price.

The general rule, according to the EIA, is that about two-thirds of your cost of gas at the pump is determined by crude oil cost.

The rest is a combination of taxes, refining, distribution and marketing.

These are ultimately just some of the 11 factors we determined influence gas prices.

With the help of the American Petroleum Institute, we delve into every single one of them.

Marketing

This includes the cost of operating the service station. It's not free to sell brand-name snacks.

Sources: EIA, API

Taxes

The nationwide average tax on gasoline is 49.5, up .7 cpg from January. The federal tax on gasoline is 18.4 cents per gallon. The average state gasoline excise tax is 20.9, unchanged from January 2012.

Sources: EIA, API

Refining Costs

Different gasoline formulations required in different parts of the country yield different prices, and the refining process itself produces different costs over the course of a year.

Sources: EIA, State of California, API

Geopolitics

The markets continue to hang on any word from the Iranian regime or sanctions thereupon. Oil supply disruptions or even the thought of supply disruptions could cause gas prices to go haywire.

Source: API

OPEC Production

According to EIA, OPEC's surplus production capacity had fallen to 2.6 million barrels per day by the end of 2011, but is expected to increase to 3.6 million barrels per day by this year. Because they are such a huge player in the energy markets, their decisions on capacity can move gas prices.

Source: API

Non-OPEC Production

For the period ended Sept. 2011, the U.S. imported 53 per cent of all crude imports from non-OPEC countries, primarily Canada and Mexico. During the same period the year before, it imported 50 per cent. In total the U.S. exports a third of all its crude from non-OPEC countries.

Sources: EIA, API

Emerging Market Demand

According to Roubini Global Economics: emerging market oil demand growth, driven by China, will soak up global supply growth, keeping the supply-demand balance tight and oil prices elevated over the next five years. A China hard-landing in 2013-14 poses the biggest downside risk to EM oil demand growth.

Sources: Roubini, API

Your State

Retail gasoline prices tend to be higher the farther it is sold from the source of supply: ports, refineries, and pipeline and blending terminals. About 62% of the crude oil processed by U.S. refineries in 2010 was imported, with most transported by ocean tankers.

Sources: EIA, API

Exchange Rates

Countries with strong currencies have seen energy prices rise less in local terms.

Sources: API, Google Finance

Weather

The general rule of thumb is mild weather = lower prices, extreme weather = higher prices. For example, during mild winters, crude inventories build up because of lower heat use, which dampen prices into spring. On the flip side, if the summer is hot, air conditioning use will send prices back up.

Sources: API, CNN

Speculation and Hedging

The most controversial of all factors. According to CFTC Commissioner Bart Chilton, the 2008 barrel price swing from $147 in June to about $30 in December was almost certainly caused by speculators.

'There was no justification for such a price swing based upon the fundamentals of supply and demand,' Chilton said. 'The only good explanation is what many researchers and prominent economists and others have said about the link to excessive speculation.'

However, he added that speculators perform an essential role in the market, as counterparties to hedging producers.

The consensus, according to the AP, seems to be that speculation does indeed cause volatility but has ultimately a minimal effect on average price.

Sources: API, AP, Politifact

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