Why Gas Prices Are So High: Breaking Down the Cost of Every Gallon

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The price you see at your local gas station isn’t set by one person or company. It’s the final number in a complex global equation that begins deep underground on the other side of the world and ends in your fuel tank.

That price reflects international markets, domestic infrastructure, government policies, and business decisions by the station owner on your corner.

What You’re Actually Paying For

When you pump a gallon of gasoline, you’re paying for much more than just liquid fuel. The retail price bundles costs and profits accumulated at every step of the supply chain.

The Four Key Components

Every gallon of regular gasoline includes four fundamental parts:

The Cost of Crude Oil: This is the raw material extracted from the ground. It’s by far the largest single component of gasoline prices.

Refining Costs and Profits: These cover processing crude oil into finished gasoline, including operational costs and the refiner’s profit margin.

Distribution and Marketing Costs and Profits: This includes moving finished gasoline from refineries to retail stations via pipeline, ship, and truck, plus the costs of operating gas stations.

Taxes: Federal, state, and local governments levy significant taxes on every gallon.

Breaking Down the Numbers

The exact proportion of each component changes over time, primarily due to crude oil price volatility. According to the U.S. Energy Information Administration, as of June 2025, for a national average retail price of $3.13 per gallon of regular gasoline, the costs broke down as follows:

While these percentages provide a recent benchmark, their fluctuation highlights market dynamics. In early 2022, the share of crude oil jumped from 52% to 61% in just one month, demonstrating its powerful influence.

The most crucial takeaway is crude oil’s overwhelming dominance. While taxes are generally fixed per gallon and refining costs are relatively stable, the crude oil portion is highly volatile. This single component drives the price swings consumers experience.

Analyses have shown that since 2020, fluctuations in crude oil prices have explained more than 90% of variation in U.S. gasoline prices. This direct link means events thousands of miles away in global energy markets have far greater and more immediate impact on prices than local gas station operating costs or even state fuel tax changes.

Crude Oil: The Global Price Driver

Because crude oil accounts for over half the cost of gasoline, understanding its market is essential. Crude oil is a global commodity, and like any commodity, its price is determined by the daily balance between world supply and demand.

Who Controls the Supply

A significant portion of world oil supply is influenced by the Organization of the Petroleum Exporting Countries (OPEC) and its allied producers, collectively known as OPEC+. This coalition, which controlled about 59% of global oil production in 2022, attempts to manage oil prices by setting production targets for members.

When OPEC+ cuts production, it restricts global supply, typically pushing prices higher. When it increases production, it adds to supply and tends to bring prices down.

A critical concept is “spare capacity”—the ability of a producer to quickly bring additional oil to market. Nearly all of the world’s spare capacity is held by OPEC members, with Saudi Arabia having the most. This capacity acts as a global shock absorber. When spare capacity is high, markets are confident they can handle unexpected disruptions. When it’s low, markets become vulnerable to sudden price spikes.

However, the group’s influence isn’t absolute. Member countries don’t always comply with agreed quotas, and internal disagreements can limit policy impact.

America’s Role as a Superproducer

The global supply picture was fundamentally altered by the U.S. shale revolution. Thanks to advancements in hydraulic fracturing and horizontal drilling, U.S. crude oil production began a steep ascent after 2009. For the past six years, the United States has produced more crude oil than any nation in history, setting a record in 2023 by averaging 12.9 million barrels per day.

This surge from a non-OPEC country created a powerful counterbalance to OPEC+’s market influence. Increased U.S. output can offset OPEC+ production cuts, adding supply to global markets and helping moderate prices.

This has created a fragile equilibrium between two competing forces: the centralized, policy-driven supply management of OPEC+ and the decentralized, market-driven production of the U.S. shale industry. OPEC+ often tries to establish a price floor by cutting production, but if prices rise too high, it incentivizes U.S. producers to drill more, which puts a ceiling on prices.

This constant push-and-pull between Riyadh, Moscow, and the shale fields of Texas creates inherent volatility that directly affects American consumers.

The Demand Engine

On the other side of the equation is demand, driven primarily by global economic growth. For two decades, from 2003 to 2023, the story of oil demand was largely the story of China. The country’s explosive economic expansion meant it accounted for over half of world oil demand growth during that period.

However, a historic shift is now underway. China’s oil demand growth is slowing dramatically and is projected to plateau around 2027. This is a structural change driven by factors like rapid adoption of electric vehicles, expansion of high-speed rail, and a major slump in its construction-heavy property sector.

With the world’s longtime demand engine sputtering, focus is shifting to other emerging economies, particularly India, to drive future growth. This marks the end of an era of predictable demand growth and introduces new uncertainty. The stability of future oil prices now hinges on whether growth in nations like India can fully compensate for China’s slowdown.

Geopolitics and Risk Premiums

Crude oil prices are highly sensitive to geopolitical instability. Conflicts, sanctions, or political turmoil in major oil-producing regions can either disrupt physical oil supply or create fear of future disruption.

Events like Russia’s full-scale invasion of Ukraine or heightened tensions in the Middle East can cause traders to add a “risk premium” to oil prices, anticipating the worst. For example, in June 2025, the price of Brent crude oil spiked from $69 to $79 per barrel in a single week amid fears of a wider Middle East conflict, even before any actual supply was lost.

This demonstrates that oil prices react not just to current supply and demand reality, but also to market perceptions of future risk.

The Journey from Crude Oil to Your Car

Once crude oil is extracted, it begins a long and complex journey to become the gasoline you pump. Each step adds cost to the final product.

The Refinery Factor

Refineries are massive industrial facilities that transform crude oil into finished products, including gasoline, diesel, and jet fuel. This is a complex and energy-intensive process involving heating and separating crude oil into different components, which are then treated and blended to meet specific fuel standards.

The United States has finite refining capacity. As of mid-2025, the nation’s operable capacity was approximately 18.1 million barrels per day. A key metric for gasoline supply is the refinery utilization rate, which measures how much of this total capacity is being used.

During periods of high demand, such as the summer driving season, utilization rates often exceed 95%, meaning the system is running at maximum output to keep markets supplied.

Summer vs. Winter Gas

One of the most predictable drivers of annual gas price increases is the switch from winter-blend to summer-blend gasoline. The two fuels are formulated differently to account for temperature changes.

The key difference is their Reid Vapor Pressure (RVP), a measure of how easily fuel evaporates.

Winter-blend gasoline has higher RVP. It’s designed to evaporate more easily, helping cars start in cold weather. To achieve this, refiners blend in less expensive components like butane.

Summer-blend gasoline is required by the EPA to have lower RVP. In hot weather, high-RVP fuel evaporates too quickly, releasing volatile organic compounds that contribute to smog formation.

To produce this less volatile summer blend, refiners must remove cheaper butane and use more expensive additives. The production process is also more complex and yields less gasoline per barrel of crude oil. These factors can add as much as 15 cents per gallon to production costs.

This switchover typically occurs in spring, requiring refineries to briefly reduce output for maintenance and retooling, which tightens supply just as demand from summer driving season begins ramping up.

When Refineries Go Offline

Because the refining system often runs with very little slack, any disruption can cause sudden and sharp price spikes. Unplanned outages from fires, equipment failures, or natural disasters like hurricanes and floods can instantly remove a large fuel source from regional markets.

A clear example occurred in August 2025, when severe flooding forced the temporary shutdown of the BP Whiting refinery in Indiana, the largest in the Midwest. This single event caused the national average price of gasoline to jump by more than 7 cents in one week.

This vulnerability is magnified by the geographic concentration of U.S. refining capacity, with a large portion located along the Gulf Coast. This makes the nation’s fuel supply susceptible to disruptions from a single major hurricane.

This geographic reality means the U.S. gasoline market isn’t a single, unified system but rather a collection of distinct regional markets with limited connectivity. Regions like the East Coast have very little local refining capacity and are heavily dependent on fuel delivered from the Gulf Coast via major arteries like the Colonial Pipeline.

When a disruption hits the Gulf Coast or a key pipeline goes down, affected regions cannot be easily resupplied from other parts of the country, leading to severe, localized price spikes.

The Final Mile

The final component of the pre-tax price is “Distribution and Marketing.” After gasoline is produced at a refinery, it’s typically shipped via pipeline to large storage facilities called terminals. From these terminals, tanker trucks make the “final mile” delivery to individual gas stations.

This covers all associated costs: pipeline tariffs, trucking fees, and retail station operating expenses, including rent or mortgage payments, employee wages, utilities, insurance, and credit card processing fees.

How Government Policies Affect Prices

Government actions at federal, state, and local levels play significant roles in final gasoline prices through taxes, environmental regulations, and energy policies.

Taxes by the Gallon

The most direct way government affects prices is through taxes. Every gallon sold in the United States includes a federal excise tax of 18.4 cents (this includes a 0.1 cent fee for the Leaking Underground Storage Tank Trust Fund).

On top of the federal tax, each state levies its own taxes and fees, and this is where the largest variations occur. As of July 2025, state-level gasoline taxes ranged from a low of just 8.95 cents per gallon in Alaska to a high of 70.9 cents per gallon in California.

Many states and localities also add other taxes, such as sales taxes, environmental fees, and inspection fees. The national average for combined federal and state taxes and fees is over 50 cents per gallon.

Environmental Regulations

Federal and state environmental regulations designed to reduce air pollution add complexity and cost to gasoline production, creating a “complexity premium” on fuel prices.

Reformulated Gasoline (RFG): In major metropolitan areas with severe smog problems, the EPA mandates cleaner-burning reformulated gasoline. RFG is specially blended to reduce smog-forming and toxic pollutants but is more expensive to produce than conventional gasoline.

Renewable Fuel Standard (RFS): This federal program requires a certain volume of renewable fuels, primarily corn-based ethanol, to be blended into the nation’s fuel supply. Refiners and gasoline importers must comply by either blending the required amount of ethanol or purchasing compliance credits known as Renewable Identification Numbers (RINs) on an open market.

“Boutique Fuels”: The combination of federal rules, state-level mandates, and regional environmental needs has resulted in numerous specialized gasoline blends across the country. These fragment the national fuel market, making it more difficult and expensive to move supplies between regions during disruptions, contributing to price volatility.

Drilling on Public Lands

The debate over leasing federal lands for oil and gas drilling is often linked to gasoline prices, but its direct, short-term impact is limited. Production on federal lands accounts for around 11% to 12% of total U.S. oil output.

More importantly, there’s a significant time lag between when a lease is sold and when oil production might begin. Federal leases typically have 10-year terms, and a company’s decision to drill depends on long-term oil price forecasts, not immediate market conditions.

Therefore, administrative decisions to increase or decrease federal leasing pace don’t have immediate effects on supply or pump prices.

The Strategic Petroleum Reserve

The Strategic Petroleum Reserve (SPR) is a U.S. government-owned stockpile of crude oil stored in underground salt caverns along the Gulf Coast. Its primary purpose is serving as an emergency buffer against severe and sudden supply disruptions, such as from war or major natural disasters.

Releasing oil from the SPR can have temporary downward effects on prices by increasing immediate supply available to refiners. In response to price spikes following Russia’s invasion of Ukraine, the Biden administration authorized a historic release of 180 million barrels in 2022.

A Treasury Department analysis concluded this action, combined with releases from international partners, helped lower U.S. gasoline prices by an estimated 17 to 42 cents per gallon from what they otherwise would have been.

However, SPR releases are short-term tools. They don’t address long-term, fundamental drivers of supply and demand and cannot be used to permanently suppress prices.

Why Prices Vary by Location

While global markets and federal policies set a baseline for gasoline prices, significant differences across the country are driven by regional and local factors.

The Geography of Gas Prices

The primary reasons for wide price variation between states and regions combine the factors discussed:

Taxes: The difference in state taxes alone can account for over 60 cents per gallon between highest and lowest-taxed states.

Fuel Blends: Regions requiring specialized, cleaner-burning fuel blends incur higher production costs passed on to consumers.

Proximity to Supply: Areas far from major refining centers and not well-served by pipelines rely on more expensive transportation methods like barges or trucks. This adds to final costs.

Case Study: The California Premium

California consistently has the nation’s highest gasoline prices, providing a clear example of how these factors stack on top of one another.

Unique Fuel Blend: California mandates its own reformulated gasoline, known as CARBOB (California Reformulated Gasoline Blendstock for Oxygenate Blending). It’s one of the cleanest-burning fuels in the world but also more expensive to produce.

Highest Taxes: The state levies the highest combination of excise and other state taxes on gasoline in the country.

Climate Programs: California has two major climate policies that add significant costs to transportation fuels. The Low Carbon Fuel Standard (LCFS) and Cap-and-Trade program require fuel providers to purchase credits to offset the carbon intensity of their products. These programs can add substantial amounts to per-gallon prices, with some estimates suggesting the LCFS alone could add $0.65 to $0.85 per gallon by 2030.

An Isolated “Fuel Island”: Because of its unique fuel requirements, California cannot easily import gasoline from neighboring states during supply disruptions. It’s effectively a “fuel island” that must be supplied by its own in-state refineries or costly marine tanker shipments. When one of its refineries experiences an unplanned outage, the state’s tight supply-demand balance is thrown into chaos, leading to rapid and severe price spikes.

Local Competition

Zooming in to the neighborhood level, price differences between nearby gas stations are determined by local business strategies and market competition. The wholesale price a station owner pays for tanker delivery sets the floor for their retail price. On top of that, they add a retail margin to cover operating costs and generate profit. The size of this margin is heavily influenced by local competition.

Business Strategy: A station with a busy convenience store might use very low margin gasoline as a “loss leader” to attract customers inside, where profit margins on items like coffee and snacks are much higher. A station with fewer in-store sales may need higher fuel margins to stay profitable.

Brand and Volume: Stations selling fuel under major brand names often have higher wholesale costs than unbranded, independent stations. Additionally, retailers selling very high fuel volumes, like warehouse clubs, can often negotiate lower wholesale prices and pass those savings on to members.

Local Market Structure: The density and proximity of competitors is crucial. Studies have shown that gas stations compete most intensely with other stations within about 1.5 kilometers. The entry of a new, aggressive competitor into a local market can force existing stations to lower prices by several cents per gallon to avoid losing customers.

This explains why you might see a cluster of stations at a busy intersection with very similar, competitive prices, while a lone station on a highway exit may charge significantly more. The local competitive landscape acts as the final arbiter of how much premium you pay over wholesale fuel costs.

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