Breakdown of Gas Prices
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Traders work in the crude oil options pit at the New York Mercantile Exchange, April 22, 2008. Oil posted a then-record high of more than $118 following oil demand from China and supply concerns from Russia and Nigeria.
When you pump $30 into your tank, that money is broken up into little pieces that get distributed among several entities. Gas is just like any other consumer product: There's a supply chain and several groups who are responsible for setting the price of the product. The media can sometimes lead you to believe that the price of gas is based solely on the price of crude oil. but there are actually many factors that determine what you pay at the pump. No matter how expensive gas becomes, all of these entities have to get their slice of the pie. According to the U.S. Department of Energy. here's an approximation of where each dollar you spend on gas goes:
[source: DOE ]
This is what the average breakdown looked like in April 2011. Let's look at those components in more detail.
Crude oil - The biggest portion of the cost of gas goes to the crude-oil suppliers. This is determined by the world's oil-exporting nations, particularly the Organization of the Petroleum Exporting Countries (OPEC), which you will learn more about in the next section. The amount of crude oil these countries produce determines the price of a barrel of oil. Crude-oil prices averaged around $35 per barrel (1 barrel = 42 gallons or 158.99 L) in 2004. And, after Hurricane Katrina, some prices were almost double that. In April 2008, crude-oil prices averaged around $104.74 per barrel. During that month, the price of oil reached a record price of almost $120 a barrel [source: DOE ]. By May 16, prices had topped $117 per barrel [source: MarketWatch ]. On May 22, markets in New York and London reported prices past $135 per barreland, and on July 11, oil hit an all-time high of $147 [source: Forbes. New York Sun ]. Analysts speculated that everything from investment in oil futures to increasing demand from countries like India and China contributed to the spike in price.
Sometimes, gas prices go
up even though there is plenty of crude oil on the market. It depends on what kind of oil it is. Oil can be classified as heavy or light, and as sweet or sour (no one actually tastes the oil, that's just what they call it). Light, sweet crude is easier and cheaper to refine, but supplies have been running low. There's plenty of heavy, sour crude available in the world, but refineries, particularly those in the U.S. have to undergo costly retooling to handle it.
Average U.S. Gasoline Prices