The trip to the pump has been getting more painful lately. On average, gas prices throughout the country rose 3.9 percent over the past week to $3.52 per gallon, according to the U.S. Energy Information Administration. That's $0.77 more per gallon than this time last year, and a jump of more than $0.50 since the beginning of 2011.
Do you know exactly what you're paying for when you fill up? Not all of your hard-earned dollars end up in the coffers of big gasoline tycoons or Middle Eastern despots. The list of players is long, so U.S. News talked to the experts to find out where your money goes when you cash out at the pump.
Crude oil. Gasoline is produced from crude oil, so fluctuations in prices of crude are the biggest factor affecting gas prices. "We're seeing prices hover around $105 a barrel, but you have seen an adjustment already take place at the pump," says Mark Luschini, chief investment strategist at Philadelphia, Penn.-based financial services firm Janney Montgomery Scott. "We're talking about a move that's certainly shocking in terms of the psychological value to see [crude oil prices] in triple digits."
According to the EIA's most recent data available, as of January 2011, crude oil accounted for 67 percent—or roughly $2.36—of your pump dollar. The price of crude is determined by supply-and-demand factors. Increased demand from growing economies like China and India, coupled with reduced crude oil production from beleaguered nations such as Egypt and Libya, has sparked fears of a prolonged reduction in crude oil supplies that could drive oil prices higher. Recent sanctions leveled against Libya—the world's 12th largest oil supplier—could further reduce supply as big oil companies such as Exxon and British Petroleum cut off trade with the embattled Northern African country.
"[It's a] function of speculation that this will evolve into something a little more grandiose," says Luschini. "Should 2 percent of the world's oil output be shut down for a day, a week, or an extended period of time, is that enough to warrant triple-digit oil prices? Probably not, but the bigger question is ... Could that spiral out into something much more significant? That's what's being baked into oil prices right now."
Although OPEC countries such as Libya contribute about 40 percent of the world's crude oil and have an estimated two-thirds of world's oil reserves, according to the EIA, the United States actually imports more oil and petroleum products from non-OPEC countries such as Canada and Mexico. So why are U.S. consumers still feeling the pinch? "Oil is a global commodity that can be shipped anywhere," says Fred Joutz, professor of economics at The George Washington University in Washington, D.C., and no country is immune to the effects of broader movements in oil markets. "Even countries that export [oil], they are not insulated."
Taxes. Uncle Sam takes the next biggest chunk out of your pump dollar. As of January 2011, 13 percent of pump dollars paid for federal, state, and local taxes. Federal taxes clock in at about 18.4 cents per gallon, while state taxes averaged about 21 cents.
Gasoline taxes vary among states. According to the American Petroleum Institute, Californians fork over about $0.48 per gallon in state taxes and fees, while Alaskans fare better, paying only 8 cents per gallon. Additionally, some states—12 as of mid-2010—levy an additional sales tax, according to the EIA, which is another reason gas prices vary between states.
Refining. Before gasoline is even produced, 80 percent of the price you pay at the pump is eaten up by the cost of crude oil and taxes, which leaves about 20 percent that trickles down to refiners and retailers. On average, only 11 percent—or about $0.34—of your pit-stop tab goes toward the production of gasoline. The refiner's cut varies based on a host of factors, including location, formulation requirements, the technology used, and even differences in the type of crude oil used to make gasoline. "It fluctuates by time of year and where you're doing it [refining]," Joutz says. "They have to make gasoline blends differently on a seasonal basis to meet air pollution requirements."
Distribution/Marketing. The remainder of what you pay at the pump goes even further downstream: distribution, marketing, and retailer costs and profits. After the refining process, the resulting gasoline is transported by pipeline and delivered by tanker trucks to thousands of gas stations and retailers throughout the country. Although a number of factors cause the actual figures to vary, including the cost of the finished gasoline product, overhead, and other operating expenses, distribution and marketing makes up 9 percent of the total cost of a gallon of gasoline, on average. Add that to profits oil companies make in the refinery process and Big Oil's profits actually come out to less than you might think, Joutz says. "The part where oil companies are really participating in this is about $0.50 out of maybe $3.40," he says. "There are thousands of gallons of gasoline sold everywhere so it does add up, but it's just not the take that people think it is. The big thing is the price of oil per barrel."
A prolonged increase in oil and gas prices could translate into bigger problems for the recovering U.S. economy, as consumers are forced to reevaluate their spending habits. "We've seen gas prices rise from somewhere in the neighborhood of $2.85 not too many months ago to about 3.50 on a national basis, which can't but help have some consumption impact for consumers," Luschini says. "That's a bit worrisome [because] that money's being siphoned from [their] discretionary funds that would otherwise be spent at stores and restaurants."
How it all plays out depends on whether political and social strife continues to roil the Middle East. "This may very well prove to be transitory," Luschini says. "If we see some calm restored into North Africa and in the Middle East, then you're likely to see oil prices abate to probably something less than $100 a barrel."