Understanding What Determines Gas Prices

 

Anyone who has filled a gas tank in recent weeks has likely noticed a big difference in the cost of fueling up. While it may have seemed that national averages would never again dip below $3.00 a gallon, consumers received a pleasant surprise in recent weeks as the average cost now sits at $2.453 (at the time this post was written) according to FuelGuageReport.com1. That’s down from an average of $3.287 just one year ago, which adds up to a lot of savings for drivers.

Gas costs were on pace to reach the lowest level in 11 years according to the U.S. Energy Information Administration2 (EIA).  However, Fortune.com3 has cited the average price for a gallon of regular unleaded gasoline has increased 28 days in a row (at the time this post was written). Prices were coming down due to a combination of lower oil prices and a focus on fuel efficiency within the auto industry, however, according to AAA4; seasonal oil refinery maintenance has limited fuel production which has contributed to the rising pump prices.

Crude oil prices determine around two-thirds of the price consumers pay at the pump every time they fill up and forecasts are showing the average price per barrel for Brent crude oil in 2015 to be around $68 per barrel, while West Texas Intermediate is showing $63 per barrel. However, it’s important to understand that there are many factors that could change these numbers, as industry price forecasting is not an exact science.

The U.S Energy Information Administration5 (EIA) notes, “Federal, state and local government taxes contribute to the retail price of gasoline. Additionally, county and city taxes may have a significant impact on the price of gas in certain locations”.  Also, “Distribution, marketing, and retail dealer costs and profits are included in the retail price of gas. Most gas is shipped from the refinery first by pipeline to terminals near consuming areas where it can be blended with other products to meet local government and market specifications”.

Fuel efficiency in vehicles has come a long way over the last 10 years. The Environmental Protection Agency (EPA) marks a change from 23.1 miles per gallon in 2005 models to nearly 28 mpg for cars produced in the 2014 model year, notes the EIA.

 

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