May 23, 2008
GASOLINE AND HOME HEATING OIL PRICES
By: Daniel Duffy, Principal Analyst
You asked why the price of home heating oil is higher than the cost of gasoline, even though taxes are imposed on gasoline that are not imposed on home heating oil.
The taxes imposed on gasoline that are not imposed on home heating oil are just one factor in determining the cost of these two products. And as the price of crude oil increases and becomes a larger factor in the consumer price of gasoline, federal and state excise taxes become a correspondingly smaller factor.
Both home heating oil and gasoline are distilled from crude petroleum. Recent significant increases in the price of crude oil have driven up the price of both products. Increases in the crude oil price appear to be the primary cause of the increase in the price of both products.
But after the oil has been refined, home heating oil and gasoline are two different products that are bought and sold in two different markets. A strong world demand for middle distillates, which includes both home heating oil and diesel fuel, is driving up the price of middle distillates. A recent decline in U.S. gasoline consumption has slowed the increase in its price.
There are both federal and state gasoline excise taxes. The federal tax is 18.3¢ per gallon and the state excise tax is 25¢ per gallon. The taxes are based on the volume sold and not on its price. This means that, as the price of the product increases, share of the selling price that can be attributed to the excise taxes decreases.
The state also imposes the Petroleum Products Gross Receipts Tax. It is imposed on the first sale of petroleum products in the state and is paid by the wholesaler that first sells it. The current tax rate is 7% of the wholesale price. It is scheduled to be increased to 7.5% on July 1. Taxed products include gasoline, aviation fuel, kerosene, and diesel fuel. There are a number of exemptions, including one for home heating oil (CGS § 12-587). Because this tax is imposed on the wholesaler's selling price, the share of the selling price that can be attributed to it remains constant.
CRUDE OIL PRICE INCREASE
The spot price of West Texas crude was $97.90 per barrel at the start of the year, according to the federal Energy Information Administration (EIA) of the Department of Energy. It increased to $125.94 on May 9. The increase is $28.04 or 29%. Chart 1 displays the weekly prices for 2008. (EIA did not report prices for Friday, March 21.)
Table 1: Crude Oil Prices
HOME HEATING OIL PRICE INCREASE
The New York harbor home heating oil spot price on January 4 was $2.68. It increased to $3.64 on May 9. The increase is $.96, or 36%.
GASOLINE PRICE INCREASE
The New York harbor reformulated RBOB gasoline spot price was $2.48 On January 4. It increased to $3.21 on May 9. The increase was $.73, or 28%.
The EIA, in the April 30 edition of This Week in Petroleum, stated that middle distillate (home heating oil and diesel fuel market factors involved) are more complex than those for gasoline. It reported that gasoline inventories built to unusually high levels in early 2008, indicating that supply was exceeding consumption. In part, this was due to a .8% drop in gasoline consumption from January through mid-March. The relatively high surplus dampened the price of gasoline relative to crude oil. The record-high gasoline prices reflect the record-high price of crude oil and not any other factor.
Unlike the gasoline market, the margins in the middle distillate market have stayed high relative to crude oil. This is because, the EIA reports, world distillate markets have experienced high demand. The high global prices meant there were high exports of middle distillates in January and February. Further, the persistent winter weather in the northeast caused a continued drain on inventory.