Ever Wonder Why Gas Prices Change So Often? The Hidden Market Forces Behind Every Dollar You Spend at the Pump
If you’ve ever driven past the same gas station twice in one day only to notice the price has changed, you’re witnessing a complex web of market forces at work. Understanding how gas stations set their prices can help you make smarter fueling decisions and better budget for one of your most frequent expenses.
The Four Pillars of Gas Pricing
The primary factors impacting gasoline prices are global crude oil cost (50-61%), refining costs (14-25%), distribution and marketing costs (11%), and federal & state taxes (14%). These components form the foundation of what you pay at the pump, but the story doesn’t end there.
Crude Oil: The Biggest Price Driver
Petroleum prices are determined by market forces of supply and demand, not individual companies, and the price of crude oil is the primary determinant of the price we pay at the pump. Crude oil prices are determined by global supply and demand, geopolitical events, natural disasters, and even seasonal changes, influenced by OPEC decisions, and future projections of the fuel market.
For instance, a hurricane in the Gulf of Mexico can disrupt oil production and lead to higher prices. This global interconnectedness means that events thousands of miles away can impact your local gas station’s pricing within hours.
The Refining and Distribution Chain
Refining is a complex and costly process that includes distillation, conversion, treatment, and blending. The distribution and delivery cost factors in everything ranging from truck to rail costs associated with transporting the gasoline from the refinery to the terminal. After the crude oil has been refined into gasoline, it is shipped to a storage tank. Many refineries use pipelines to distribute the gasoline to terminals. Tanker trucks then deliver the gas to individual gas stations.
How Individual Gas Stations Set Their Prices
Retail stations set prices to be competitive in their local market. They must factor the need to pay for the next delivery of gasoline (i.e., replacement costs) into the price they set. Gas stations are constantly monitoring their competitors’ prices. If a nearby station lowers its prices, others may follow suit to stay competitive.
In addition to these factors, retail stations have to address local factors that can impact retail fuel prices such as store types (branded or unbranded), store location & local competition, fuel delivery method, length of existing contracts with suppliers, volumes purchased, and specific store considerations (e.g., labor costs, real estate costs, electricity, credit card fees, equipment cost & maintenance, etc.).
Branded vs. Unbranded Stations
A branded station — think Exxon or BP — can only buy its contracted brand of gasoline, which boasts a special recipe. An unbranded station, Sheetz or Costco, buys basic, wholesale gasoline, which makes it cheaper, but leaves the station with a less guaranteed supply. This difference in supply arrangements directly affects the pricing flexibility each type of station has.
Regional and Regulatory Factors
With the 1990 Clean Air Act, the U.S. Environmental Protection Agency rolled out the first phase of a program that requires “cities with high smog levels” to use reformulated gasoline (RFG), which is more expensive to produce. This accounts for some of the variance between metropolitan and rural prices.
The federal excise tax is 18.40¢ per gallon (cpg), and state gasoline fees and taxes range from a low of about 15 cpg in Alaska to as much as 68 cpg in California and around 59 cpg in Illinois and Pennsylvania. On average, state taxes and fees average about 39 cpg and when combined with federal taxes average 57 cpg at the pump.
Current Market Trends
Gasoline prices in the United States have experienced significant fluctuations over the past three decades, with 2024 seeing an average price of 3.3 U.S. dollars per gallon. This marks a notable decrease from the record high of 3.95 U.S. dollars per gallon in 2022, yet remains considerably higher than prices seen in the early 2000s.
The U.S. retail price for regular grade gasoline averaged $3.30 per gallon (gal) in 2024, $0.21/gal less than in 2023. Lower crude oil prices and narrower refinery margins in 2024 than in 2023 both contributed to the decrease in U.S. retail gasoline prices.
The Reality of Gas Station Profits
Despite the complexity, the average gas station makes only a small profit on each gallon of gasoline sold. Most of their profit comes from convenience store sales and other services. Profit margins are already slim (think $0.05 to $0.07 per gallon), and when gas prices are high, people spend less on items inside the station convenience store (like candy and beer) — and that’s where 70 percent of the gas station profit is made.
Understanding Your Local Market
Companies like OK Petroleum, a family-owned business serving Long Island for over 40 years, exemplify how local market dynamics work. OK Petroleum is a leading supplier of home heating oil, gasoline, and wholesale motor oil in Suffolk and Nassau counties on Long Island, NY. The company prides itself on providing affordable and high-quality fuel delivery services for both residential and commercial clients. In addition to oil delivery, OK Petroleum operates a network of full-service gas stations and offers various fuel products to ensure convenience and efficiency for its customers.
The key to their success lies in their policy of putting customers first. At OK Petroleum, they actually mean what they say. They promise to provide reliable service, the highest quality products, and the most affordable prices—and they always deliver on their promise.
Making Informed Fueling Decisions
There is no central authority or group of people who decides each day what gasoline is going to cost. The process that influences the cost of a gallon of gasoline at a particular station on any given day is dependent on decisions made by thousands of independent suppliers, refiners, wholesalers and marketers who supply the different grades of gasolines to retailers.
Understanding these market forces can help you become a more informed consumer. Gasoline demand typically rises in the summer when more people are traveling, leading to higher prices. Conversely, demand often drops in the winter, which can lead to lower prices. Planning your larger fuel purchases around these seasonal patterns, when possible, can result in meaningful savings.
The next time you see gas prices fluctuate, remember that you’re witnessing a complex interplay of global markets, local competition, regulatory requirements, and business economics all working together. While individual gas stations have some control over their pricing, they’re ultimately responding to forces much larger than any single business can control.