Why Are Gas Prices So High, And What Will Bring Them Down?

Gas prices are setting records on an almost daily basis. Wednesday’s record price of $4.40 a gallon, according to AAA, was quickly eclipsed Thursday when the national average hit nearly $4.42 a gallon. Why do gas prices seem to know only one direction these days? It’s easy to blame oil companies, gas station owners, even the president for the record-breaking prices. But there are actually a lot of factors that contribute to the price at the pump — whichever direction it’s moving — including the cost of a gallon of gas itself. 

Here’s a breakdown:  

Oil: The price of crude typically accounts for about 60 percent of the price of a gallon of gas. A barrel of oil holds 42 gallons. When oil is at $100 a barrel (a little below its current price), that means roughly $2.40 of every gallon of gas is just the price of the oil itself. 

Refining: Turning crude oil into gasoline and getting it to your local station requires a number of steps, each with its own costs. Refining typically accounts for around 18 percent of the per-gallon price, according to the American Petroleum Institute. But that percentage can jump quickly. Many refineries are on the Gulf Coast and can be flooded or otherwise damaged during hurricane season and forced offline, which can cause prices to spike. Hurricane season begins in June and runs through November.

Distribution: Getting that refined gas through pipelines or onto trains, then into trucks to be delivered to gas stations’ underground tanks, typically adds another 12 percent or so. But the higher gas prices go, the more it costs to transport it, which can drive distribution costs even higher. Unexpected disruptions can also lead to shortages and price spikes, such as the ransomware attack last May on the Colonial Pipeline, which shut it down for a week.

Taxes. Federal taxes add about 18 cents per gallon. States levy their own taxes, which, on average, add another 31 cents to the price. U.S. drivers have it much easier than drivers in many other parts of the world, where gasoline is taxed more heavily. Nonetheless, ordering a suspension or holiday on gas taxes is something politicians can do easily, one reason gas-tax rollbacks have been proposed or enacted in nearly 30 states.   

Profit: It’s tempting to blame gas station owners for high prices. And stations do make a hefty profit on an indispensable fuel that millions of drivers depend on to get through the day: coffee, not gas. Gas is sold as close to cost as possible to lure customers into the adjoining convenience store to buy a drink or a slice of pizza, where the profit margin can be 20 percent or more. 

Most of the profit on gas is made way back at the beginning of the process by oil companies that do the drilling and exploration. 

Supply and Demand: The single biggest driver of gas prices is supply and demand. Because of OPEC’s size, its decisions to raise or lower output do have influence, but oil trades on a global market and expanded oil production by countries that are not part of the cartel, including the United States, have reduced OPEC’s ability to set market prices.

Before it invaded Ukraine, Russia contributed about 10 percent toward the world’s oil production. Even an increase in production and releases by the U.S. and Europe of reserves isn’t enough to make up for the subtraction of Russian oil from the market. Although some Russian oil is being bought by China and other nations that are ignoring Western sanctions, the lack of demand has caused production to slow sharply, industry observers say. 

Illuminating though they may be, explanations of how gas prices reach the stratosphere may not make it any easier for people to look past what, for many, has become the most visible reminder of how inflation is seeping into daily life, a cent at a time. 

Reminders that things could be worse, historically speaking, also aren’t likely to go far in soothing the pain at the pump. The price of a gallon of gas in June 2008, when adjusted for inflation, would cost the equivalent of $5.38 in today’s dollars, far above the current record. And given rising incomes, gas costs as a percentage of income aren’t nearly as high as they once were. But context only goes so far when it comes time to fill the tank.