Most people have probably noticed that gasoline prices have recently been coming down. In recent years the $4 per gallon price point has been where gasoline prices have tended to average. When prices are above that point they appear relatively expensive, and now falling below $4 per gallon the price of gasoline feels more like a bargain.
There are four main components that influence the price of gasoline at the pump: the price of crude oil, refining, retail costs and taxes.
The price of crude oil is actually the largest component, in terms of what we pay at the pump. This is different compared to most consumer goods, where the raw material is often only a minor cost of the end product. For example, the cost of wheat in a loaf of bread is relatively small compared to what we pay for the bread.
People oftentimes will hear the price of oil quoted in dollars per barrel. In recent years this price has been around $100 per barrel. There are 42 gallons in a barrel, so the per gallon cost of oil at $100 per barrel is approximately $2.40.
Next there is the cost to refine the oil into gasoline. In California because of our stricter smog controls this cost is higher than the national average. In addition summer blend gasoline costs relatively more than the winter blend. Periodically there are refinery outages, and that can sometimes cause a spike in the price of gasoline.
The cost to sell the gasoline is fairly stable. For retailers gasoline is a relatively low margin high volume business. Retailers will usually sell other products at a much higher margin at the gas station.
The final item would be taxes. The federal tax on gasoline has not been raised in many years. In California our taxes are significantly higher than the national average. Higher taxes along with higher refining costs explain why the price of gasoline in California is typically about 40 cents per gallon higher than the national average.
What has occurred recently is that the price of oil has been coming down. The price of crude oil, which had been over $100 per barrel for much of the year has fallen to $92 per barrel, as of this Monday.
There are a number of factors that can influence the price of crude oil. However, what appears to be the most significant is that U.S. dollar has strengthened recently. Oil is a global commodity priced in dollars, so when the U.S. dollar is stronger the cost of our imports goes down.
The reason for the dollar strength is the weak Euro. Because of the stagnant economies in much of Europe, the European Central Bank has lowered interest rates, which has led to weakness in the Euro.
A stronger dollar also impacts other commodity prices besides oil, but the impact is most noticeable with regards to gasoline. In essence a stronger dollar helps to lessen inflationary pressures, and is a positive for the American consumer.
Lower gasoline prices are also helping auto sales. In addition strong replacement demand and attractive financ- ing terms are factors in the resurgence of auto sales this year. In August we saw the strongest monthly sales fig- ure for cars in more than eight years.
If the price of crude oil stays near current levels the price of gasoline should tend to con- tinue to fall. Prices normally decline late in the year, as we pass the summer driving sea- son and refiners start to shift over to the cheaper winter blend.
Starting in January cap-and- trade legislation to combat global warming is scheduled to take effect. This will likely cause the price of gasoline to increase at least 20 cents per gallon and further widen the gap between California and national prices. There is the possibility that this legislation could be modified or delayed, so that the impact would not be that significant.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.