The price of a gallon of gasoline averaged $2.47 a gallon in April 2015. Ever wonder how much of that goes to the government and how much goes to exploration and refining companies? And don’t forget the gas stations and oil traders looking to make a profit as well.
Below, we take a look at the breakdown of who earns what and why prices vary across the country – sometimes drastically.
What consumers pay at the pump is dished out to multiple parties. “Upstream” companies make their cut at the beginning, drilling for oil then sending it for refining. The refineries convert the product to gasoline, after which it is transported. The gas is then marketed and ultimately sold to you, the consumer, by gas stations – all of these parties are called “downstream” companies. How much of the pie the government and different sectors earn 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.
Crude oil is the raw material for a gallon of gasoline and it greatly affects the price. U.S. Energy Information Administration (EIA) data indicates that the cost of crude eats up about 51% of what consumers pay at the pump. If you pay $2.47 per gallon, $1.26 of that is attributed to the price of crude. However, this can vary greatly; Exxon has stated that up to 80% of the cost of gasoline can come from crude costs, while at the same time 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 earn varies. Companies such as Exxon (XOM), Chevron (CVX), BP (BP) and Anadarko (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, for example, 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 was between $4 and $6 per barrel.
Thus, upstream 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.
Downstream production typically includes all companies that get gasoline to the pump after the extraction process. This includes refiners, transportation, distribution and marketing companies. 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 23% 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 upstream 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 consumers go to an Exxon or Chevron gas station, the gas station is actually owned by the company named 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’s financial statements.
Surprisingly, most of the profits for gas stations comes from the other products sold, and not gasoline. According to NACS Online’s 2015 report, the average mark-up per gallon of gas by the retailer was 18.9 cents over five years, but that is not all profit. After expenses, the gas station only makes about 3 or 5 cents per gallon sold.
Thank the government for about 18% of your cost at the pump as of April 2015 – although this varies greatly across the country. Federal taxes account for 44.46 cents per gallon. 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 36 cents per gallon – one of the highest in the country.
Total taxes are highest in Pennsylvania, averaging 70 cents per liter as of April 1, 2015. Alaska and South Carolina had the least total tax per gallon at 29.70 and 35.15 cents, respectively [see also What You Need to Know About Commodity ETFs, ETNs, and Contango].
Taxes per gallon in 2015 are lower than they’ve historically been due to a gradual tax decline. In 2000, taxes accounted for about 30% of costs 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. Politics also affects 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?].
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 the price at the pump as well as 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. In addition, since there is a delay in the time it takes for crude to be pulled from the 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].
Disclosure: No positions at time of writing.