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Gasoline prices tend to be volatile due to a number of
factors ranging from feedstock availability,
fundamental supply/demand shifts, plant
outages, government taxes and
fuel specifications.
The basic costs to produce and deliver gasoline to
consumers take into account the following:
- Cost of crude oil to refiners
- Refinery processing costs
- Marketing and distribution costs
- Retail station costs
- Taxes
From the refinery, gasoline can be shipped via pipeline,
barge or truck. There are various markups added along the way,
from the wholesale level where the trucks pick up the product,
to the retail level where it is pumped into the car. These
markups can vary widely, and how much each of the above
factors contribute to total costs differs from region to
region due to the formulations required to produce different
grades of gasoline.
Over the last two decades, rapid gasoline
price increases have occurred in response to crude oil
shortages. In a simplistic correlation of how crude affects
gasoline, if refiners cannot make money producing gasoline,
among other products, from crude, they will not buy crude.
This will result in the price of crude going down until an
'affordable' level for producing gasoline. Conversely, if the
refiners can make profits making gasoline, they will bid
heavily for crude, driving up the price of crude until it no
longer makes any sense to make gasoline. These two act as a
balance.
Crude oil prices are determined by
worldwide supply and demand, which is heavily influenced by
the Organization of Petroleum Exporting Countries (OPEC).
OPEC has the potential to influence oil
prices worldwide because its members produce nearly 40% of the
world's crude oil and hold close to 70% of the world's
estimated crude oil reserves.
When crude oil prices are stable, retail
gasoline prices tend to gradually rise before and during the
summer "driving season" and then fall in the winter. This
traditional "driving season" in the US and Europe often
results in increased demand for gasoline and hence higher
prices. It has always been during this time of the year when
arbitrage opportunities are created as players seek to take
advantage of price differentials between the regions.
Supply/demand imbalances can also drive gasoline prices
both up and down. For example, if demand rises quickly or
supply declines unexpectedly due to refinery production
problems or lagging imports, gasoline inventories may deplete
rapidly. When stocks are low, some wholesalers become
concerned that supplies may not be adequate over the
short-term and bid higher for available product, pushing
prices up.
The price of basic energy, like gasoline, is generally more
volatile than other commodity prices as consumers are limited
in their ability to substitute fuels when prices fluctuate.
Unless the shift towards the use of alternative fuels becomes
more pronounced, global reliance on gasoline, as a key source
of vehicle fuel, will remain.
As with all other commodity products, government taxes
account for a considerable component of the retail price of
gasoline.
In the US for example, taxes in 2000 (not including county
and local taxes) accounted for approximately 28% of the cost
of a gallon of gasoline, according to the Energy Information
Administration (EIA). Within this national average, federal
excise taxes were about 18.4 cts/gal and state excise taxes
averaged 19.96 cts/gal. There are also additional state sales
taxes, some of which are applied to the federal and state
excise taxes.
Gasoline specification changes can also influence product
prices. Changes in specifications may alter the way the
product is traded. As different refineries produce gasoline
with different specifications, consumers may need to seek new
sources of gasoline if their current supplier cannot meet
tighter product specifications.
Restrictions on the content of the oxygenate MTBE in
gasoline will also affect certain imports which may fail to
meet the grade due to excessive MTBE content. The US, for
example, is in the midst of proceedings to ban the use of MTBE
in gasoline.
Gasoline specifications govern odor, color, research octane
number density, sulfur content and MTBE content. Different
grades of gasoline are produced to serve regional market
demand and to meet varying environmental requirements.
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