Cost of crude oil continues to be largest factor in gasoline prices

Multiple factors influence the cost of gasoline, but the market price of crude oil is the most important.

Like many Americans, you probably spend a significant amount of time at the pump, filling up your vehicle's gas tank. And, especially during peak travel seasons when fuel prices tend to spike, you have probably stop to wonder why gas costs as much as it does.

While people may think that taxes or high mark ups are what makes fuel expensive, an analysis conducted by the U.S. Energy Information Administration showed that these are actually relatively minor factors. According to the EIA, the greatest portion of gasoline prices is linked to the cost of operating drilling and oil production equipment. However, it is a long journey from the oilfield to your local gas station and costs are added throughout the process.

Looking at the breakdown of costs for a gallon of gas sold at a retail price of $3.27, the EIA determined that about 80 percent of that sum—$2.62—is needed to pay for the crude oil, the price of which is set on global markets. Although a surge in domestic oil production has reduced dependence on foreign suppliers, U.S. refineries continue to source much of the crude oil they use from abroad.

Slightly more than 10 percent of the price of crude—about 40 cents per gallon in the EIA's example—covers refining expenses. Companies in this segment of the industry typically operate with low profit margins, as they must pay whatever price is set by the market for raw materials. Distribution and marketing costs account for another 33 cents, while taxes directly add 30 to 60 cents to the cost of a gallon of gas, with significant variation between states.

As this blog discussed in a recent post, analysts have expressed differing opinions regarding the probable trajectory of oil prices in 2014, as well as the impact that pricing shifts may have on producers and other industry stakeholders. Economic trends will play a key role in determining the price of crude, as will technological developments that affect demand and the cost of production.

Well operators can shore up their bottom line by implementing advanced artificial lift equipment such as the hydraulic jet pump. This versatile solution can improve recovery rates at straight, horizontal or deviated wells, while lowering the demand on power sources.