Consumers: Why are gas prices so high?

Posted: Tuesday, March 22, 2011 5:00 am | Updated: 4:31 pm, Mon Mar 21, 2011.

WHITE MOUNTAINS - News stories about fuel prices are usually about that day's fuel prices. Consumers want to know why the at-the-pump price is what it is. Why consumers want to know is simple: So they can budget for it. The why behind the per-gallon cost of gasoline is not so simple.

The price paid by the consumer for a gallon fuel is not based on what it originally cost the gas station's owner, but what it will cost to replace it. In a market where oil prices are on the rise, the gas station owner needs to anticipate what the next load of gasoline is going to cost.

For example, a retailer purchases 200 gallons of gasoline to sell at $3.40 per gallon. The next week the retailer's cost goes up. In order to make a profit at the new cost the retailer has to raise his at-the-pump price to $3.50 per-gallon.

Even if the retailer still has 50 gallons of the gasoline he purchased at the lower price, the consumer pays the higher price.

While that may not seem fair to the consumer, it does seem so from a retailer's perspective.

It is not illegal for the retailer to do so. It's a free market system.

Additionally, things like environmental regulations, special fuel blends, refinery locations, taxes and contractual obligations affect a price.

The state gasoline tax in Arizona is 18 cents per-gallon for gasoline, 26 cents for diesel, depending on vehicle classification. Combined, state and federal taxes are 37.4 cents of every dollar's worth of gas in Arizona. Nationwide the average is about 42 cents.

Former U.S. Secretary of Transportation Mary Peters said in August of 2007 that about 60 percent of federal gas taxes are used for highway and bridge construction. The remaining 40 percent goes to earmarked programs.

Roughly 20 cents of every dollar collected in state gas taxes, motor vehicle fees or tolls nationwide is used for public transportation and other government purposes.

Arizona instituted its Highway User Revenue Fund (gasoline tax) in 1986 limiting its use to funding highway construction, improvements and other related expenses.

An estimated $1.4 billion budget deficit in fiscal year 2011-12 has prompted the state Legislature to look at eating into those state-shared revenues, leaving Arizona, like a lot of other states, looking at things like toll roads to possibly pay for construction and improvements.

That does not however fully answer consumer questions about why the price of a gallon of fuel is so high.

According to information from AAA Arizona, the going price of a gallon of gasoline depends on a number of things.

Price can be profoundly changed by the per-barrel cost of crude oil, refining costs, transportation costs, supply and demand, futures market speculation by investors, political conditions, civil/regional unrest and more.

As for supply and demand, there are a finite number of refineries in the country, about 150, none of which are in Arizona. That means all of our gasoline comes from out of state. Most of the gasoline (60-70 percent) comes from California. The rest (35-40 percent) comes mostly from the east line with a very small amount coming from New Mexico.

There used to be around 300 refineries nationwide, but closures due to oil industry business decisions and/or government-mandates cut that number about in half.

Additionally, net losses in refining capacity of about a million barrels per day has added to what appear to be never-ending increases in at-the-pump consumer costs in spite of apparent promising fluctuations.

It's routinely believed that oil companies deliberately squeeze supply in order to raise the price of gas which adds to consumer frustration.

Even though investor speculation in market futures may seem unfair to most consumers, it is not illegal unless refining companies are conspiring to set prices or drive competitors out of business.

To date, investigators and industry watchdogs have found no evidence of such illegal activity.

Finally, most of Arizona's gasoline is EPA mandated reformulated Arizona Cleaner Burning Gasoline (CBG). CBG costs more to produce and is used in Maricopa County to meet clean air standards. That adds to the cost of fuel in the Phoenix metropolitan area.

Tucson uses a special oxygenated fuel during winter months.

The rest of the state uses conventional unleaded gasoline year-round.

AAA Arizona representatives also say that the state uses approximately 7.3 million gallons (173,000 barrels) of gasoline daily.

As for building a refinery in the state to perhaps help keep fuel prices at a minimum, a 2003 survey indicated that about 89 percent of AAA members said yes, if all environmental concerns are met. Arizona Clean Fuels proposed a $2 billion refinery near Yuma and has purchased land to build it but so far construction has not gotten underway.

Options other than a refinery include expanding existing pipelines and additional new pipelines.

The Longhorn Pipeline from Houston to El Paso is finished providing Arizona access to additional gasoline from refineries in the Houston area. It meets up with the Kinder Morgan East Line, which is being expanded from 8 inches to 12 inches in diameter.

Reach the writer at mleiby@wmicentral.com