Understanding Gas Price Components and Potential Relief Options

The average price for a gallon of gasoline was nearly $4.25 on March 9, while a year ago it was $2.82. What factors go into gas pricing and how did we get here?

There are four components to the price of gasoline – the cost of crude oil, state and federal taxes, refining costs and marketing/distribution. A brief description of each follows.

Crude Oil

There are many factors that impact the price of crude oil. According to the U.S. Energy Information Administration (EIA), this factor made up approximately 43% of the cost of a gallon of gasoline in 2020. World circumstances, demand, supply and financial markets impact the daily price of crude. As a commodity, the price of crude oil is extremely volatile and price can vary greatly on a daily basis.

State and Federal Taxes

This is the most straightforward pricing component to a gallon of gasoline. There are three types of taxes on a gallon of gas sold in Michigan. The state gas tax is 27 cents, federal gas tax is 18 cents and the state also charges 6% sales tax on the sale of gasoline and diesel. In 2020, the EIA indicated that these taxes made up 22% of the cost of a gallon of gasoline.

Refining Costs

Crude oil needs to be refined into usable products by heating it up and separating the resulting substances into different material. Crude oil is transformed into gasoline, diesel, asphalt, fuel oils, heating oil, kerosene, liquefied petroleum gas and others. These products are then used in different industries. In addition to transportation fuel, petroleum serves as base material for cosmetics, textiles, plastics, food preservatives, packaging, solar panels and hundreds of other items. In 2020, refining costs accounted for 25% of the retail price of gas, according to the EIA.

Marketing / Distribution

The resulting substances then need to be moved to terminals for distribution to the end user. This factor would include the employees, tanker trucks, stores and infrastructure to deliver fuel to the driving public. In 2020, the EIA indicated such logistics accounted for 10% of the cost.

Keeping these four factors in mind, the only real long-term fixed price point is the cost of state and federal taxes. Crude prices have varied widely in just three months, from $68.23 a barrel on Dec. 20, 2021 to a high of $123.70 on March 8. You can start to start to understand why the price at the pump has varied so greatly since the beginning of the year.

There’s been a lot of state and national coverage about political leaders calling for gas tax holidays. These can take the form of a state suspension of gas or sales taxes for a period of time or pausing the federal gas tax. Recently, Michigan Gov. Gretchen Whitmer signed onto a letter calling on the federal government to pause the federal gas tax. At the same time, she vetoed legislation pausing the state gas tax. Her rational was that the state of Michigan relies heavily on its gas tax for funding road repairs and without that source of revenue the state’s roads would continue to be among the worst in the nation.

At this point, legislative leaders and Whitmer appear to be gravitating towards a pause in the state sales tax that is applied to motor fuel. Whether or not that will materialize, has yet to be seen. If you’re business is going to be impacted by any of these proposed changes, reach out to Plunkett Cooney and discuss your options.

The next time you’re agitated and looking to take out your frustration on that local gas station clerk, remember they are only a small part of the overall gas price equation. You should probably also start to realize that the $1.50 20-ounce bottle of water you recently bought actually equates to $9.60 per gallon – more than what you paid for the gas to run your car to get to the store to buy it.

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