What's Up With Gas Prices? You Ask, We Answer

As the summer driving season kicks off, we explain what decides the price at the pump, from crude oil to taxes.

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Gas prices in the Washington, D.C., area (shown above in December) are down significantly compared to last summer, largely because of the fall in crude oil prices. Canada, however, is not seeking as big of a break at the pump.


When drivers hit the road for fun this summer, filling up at the gas station will be easier on the wallet. Compared to last year, fuel should cost more than a dollar less per gallon in the United States. It will likely be lower in Europe, too.

The wild trajectory of gas prices over the past 10 years can sometimes feel more stomach-churning than any amusement park ride. Factor in the differences among fuel types, states, and countries worldwide, and it's no wonder traveling consumers have questions. We answer a few here.

U.S. gas prices will average $2.45 a gallon this summer—a 31 percent drop from last year's $3.59 average, according to a forecast by the Energy Information Administration or EIA. In Europe, they’re estimated to drop by up to 25 percent compared to last year.

The questions above show that when it comes to gas prices, everything's relative. While U.S. and European gas prices generally are up from where they were a few weeks ago, they are down compared to last year, and expected to stay that way through summer.

The reason for this drop, not surprisingly, is crude oil's big market tumble. As the main component of auto fuel, crude oil accounts for 46 percent of American gas prices, according to the EIA. The rest comes from taxes and the costs of refining the product and bringing it to market. U.S. crude oil prices are currently about $60 a barrel, nearly half what they were last year.

Any trend in crude oil prices will affect consumers at the pump, says Michael Green, spokesperson for the Heathrow, Florida-based automotive association AAA.

Prices for both crude oil and auto fuel are based on supply and demand,and the dramatic increase in U.S. oil production has led to an oversupplied market. 

"It’s this glut in oil that helped push gas prices to the lowest level since 2009," Green says.

He notes that international events such as unrest in the Middle East, which can cause uncertainty about supply and drive prices up, also exert an influence. Other factors that decide gasoline prices include taxes (the American Petroleum Institute has a state-by-state map here), refinery issues, and regional variations—the U.S. Gulf Coast, for example, is close to both oil production and refineries, so it tends to have lower prices than the rest of the country.

Even as the price of oil remains relatively low, consumers can still see price spikes, and more than one reader wanted to know why. "People can be frustrated because on one day their gas prices will jump 10 cents a gallon," Green says. "This often happens because of refinery problems." If a refinery near you suffers a glitch, it can constrain supply and, in turn, boost prices.  

One reader asked specifically about British Columbia, Canada, where prices haven’t dipped much since oil hovered at $100 a barrel. Vancouver has some of the highest gas prices in North America (currently about $4.12 per gallon), according to Dan McTeague, senior petroleum analyst for the consumer information site GasBuddy.com.

Canadians are seeing a break of between 10 percent and 20 percent from last year's prices, according to GasBuddy.com data—not as much as one might expect given the tide of crude coming out of its oil sands.

Unfortunately for Canuck drivers, refineries there can't match demand, and so the country buys refined fuel from the United States. A weak Canadian dollar means those imports don't come cheap, McTeague notes. That, combined with high taxes in many provinces, means that crashing oil hasn't delivered as much of a price break for Canadians.

North American gas prices also follow seasonal fluctuations. Prices tend to be highest in the spring, Green says, because that's when many U.S. refineries go offline for maintenance. Then prices stay elevated through the summer as more people take to the road, driving up demand for fuel.

The summer blend of fuel, too, costs more to produce: Required by law in both the U.S. and Canada to keep emissions in check, it contains less of the "fillers" that can evaporate in warm temperatures. Its higher energy density means you'll get slightly better mileage for your buck.

The main factors that drive international fuel price differences are taxes and subsidies. In countries such as Venezuela and Egypt, for example, longstanding government subsidies—essentially financial support to defray the cost of fuel—have kept prices at the pump artificially low. Elsewhere, such as Norway and Turkey, high taxes make fuel very pricy compared to the rest of the world.

Another factor, Green says, is transport costs. In the U.S., ample refining and pipeline capacity help keep prices down. "If you’re in Europe," he says, "in many cases you may receive your product by ship from somewhere else, and those transport costs can make it more expensive to purchase gasoline."

Yet ready access to oil supply doesn't necessarily translate into lower gas prices, as Canada illustrates. Despite booming oil sands production, it's short on refined product and suffers from a weak exchange rate when it buys from the United States.

In the U.S., diesel has been more expensive than regular gasoline since 2004, according to the EIA, primarily for three reasons: demand for diesel has gone up worldwide; new emissions standards raised costs for producers and distributors; and the federal tax on diesel is 6 cents higher per gallon.

"So much of the diesel that’s produced in this country is exported overseas, which leads to higher prices for U.S. consumers," Green says.

Diesel has its own seasonal fluctuations, similar to heating oil. Refineries that produce both, especially in the Northeast and Midwest, will concentrate on heating oil during the winter, so diesel supplies suffer and prices go up.

"The price spread between gasoline and diesel is generally at its most narrow in the summer," Green says, when diesel doesn't have to compete with demand for heating oil.

The situation is different for most drivers in Europe, where prices at the pump tend to be lower for diesel than for regular gasoline, mostly because diesel is often taxed at a lower rate.

Do you have an energy question? Tweet it to Christina Nunez or leave one in the comments.

The story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

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