June 9, 2008
By: Daniel Duffy, Principal Analyst
You asked (1) what factors affect the price of gasoline, (2) for the current gasoline wholesale and retail prices in southwestern Connecticut, and (3) the effect of taxes and on gasoline's retail price.
The law does not regulate gasoline prices or determine the way in which gasoline retailers set prices. In Connecticut, the retail price of gasoline is determined by the individual retailers that own the businesses operating the stations. The federal Energy Information Agency (EIA) estimates as of last April how much four different components contribute to the retail price: crude oil (73%), taxes (11%), refining costs and profits (10%), and distribution and marketing costs and profits (6%). The state of Connecticut attempted to estimate the factors in a study conducted in 1998. The state study listed over a dozen different factors but did not quantify their impact.
Changes in the price of crude oil are the primary driver of changes in gasoline's retail price. The other primary components of its cost have stayed about the same while the prices of crude oil and gasoline has increased.
New Haven is the closest wholesale distribution point to southwestern Connecticut. The wholesale price for regular reformulated gasoline (RFG) was $356.95 at 5:00 p.m. Friday, June 7. The AAA states that the average retail price for a gallon of gasoline in the Stamford area is $4.52.
State taxes increase the price of a gallon of gasoline by 49.9¢. The scheduled increase in the petroleum products gross earnings tax (from 7% to 7.5%) will increase the price of a gallon of regular RFG in southwestern Connecticut by 1.8¢, based on the most recent New Haven wholesale price.
FACTORS AFFECTING THE PRICE OF GASOLINE
The price of crude oil, according to the federal Energy Information Agency (EIA), is the most significant price factor affecting the retail price of gasoline. As the cost of crude oil increases, its share of the retail price increases. In 2007, the price of crude oil averaged about $68 per barrel and accounted for about 58% of the national average retail price of a gallon of regular grade gasoline. In comparison, in 2005 the average crude oil price was $50 per barrel and the crude oil cost was 53% of the retail price. From 2000 to 2007 the average crude oil price was about $39 per barrel and the crude oil cost share of the retail gasoline prices averaged 48%. The cost of crude was $122.30 on June 4, 2008, according to the EIA. As the cost of crude oil surges, the other factors account for a smaller share of the retail price.
As of last April, the EIA estimated that the cost of crude oil comprised 73% of the retail price, which was then $3.46 per gallon. It calculated the crude oil cost as the monthly average of the crude oil purchased by refiners. Federal and state taxes combined accounted for 11% of the cost. The EIA stated that refining costs and profits comprised 10% of the cost, which it calculated as the difference between the monthly average spot market price and the average price of the crude oil purchased by refiners. Finally, the EIA calculated that distribution and marketing costs and profits (the difference between the average retail price and the sum of the other three components) accounted for 6% of the costs.
The legislature decreased the gasoline excise tax in 1997 and required the Office of Policy and Management to determine if the tax reduction was passed along to consumers. It determined that the 3¢ decreased was passed along. OPM's report examined the “broad range of factors at the international, national, regional, state and local levels” that affect the price of gasoline (Final Report of the Office of Policy and Management to Governor John G. Rowland on Gasoline Pricing and the Passthrough of Motor Fuels Tax Reductions, p. 7, January 29, 1998). The report identified over a dozen different factors, including fuel supply, demand, inventory level, consumption, import level, and type of gasoline. To meet air quality goals, Connecticut retailers must sell reformulated gasoline (RFG), which costs more to make than conventional gasoline. It stated that “increased role for the spot and futures markets, and of traders in these instruments” (p. 8). It pointed out that gasoline inventories have been reduced and therefore the role of the spot markets to meet supply commitments and in setting prices becomes more important.
The report listed only a few factors that can be characterized as regional or local. These include transportation costs (distance from refineries and wholesale distribution centers), fuel type (e.g. RFG), and state and local taxes. Gasoline stations are subject to local property taxes.
PRICES OF CRUDE OIL AND GASOLINE
The fact that the price of crude oil is the primary driver of changes in the retail price of gasoline is illustrated by Chart 1, which displays the weekly prices of crude oil and gasoline from the beginning of June 2006 to June 2008. Every other month is marked with a vertical black line. The red line (square data points) displays gasoline prices and the dark blue line (round data points) displays oil prices. Gasoline prices per gallon are stated on the left side of the chart, crude oil prices per barrel on the right. The price curves show that, as a general pattern, retail gasoline prices reflect the changes in the crude oil prices. But a difference emerges beginning in the fall of 2006 when the retail price of gasoline dropped more than the price of oil and again in the spring of 2007 when the price of gasoline increased rapidly when the price of oil did not. Despite the occasional differences, the chart shows that changes in the retail price of gasoline follow changes in the wholesale price of crude oil. Data was taken from the price history spreadsheets on the EIA website.
Chart 1: Weekly Crude Oil and Retail Gasoline Prices
There are two wholesale distribution centers in Connecticut, New Haven and Rocky Hill. The Department of Revenue Services supplied the following wholesale prices per gallon for regular RFG The prices were compiled by the Oil Price Information Service and represent the price at 5:00 p.m. Table 1 shows that prices have been rising steeply.
Table 1: Wholesale Prices
Because New Haven is the closest distribution point, it apparently supplies the gasoline for southwestern Connecticut. The New Haven wholesale price increased by nearly 26 cents from Wednesday to Friday last week.
The EIA does not report average retail prices for Connecticut, but it does report average prices nationally and for regions of the country. It reports that the average retail price nationally for regular RFG was $3.98 per gallon on June 2, representing an 81¢ per gallon increase from one year ago.
The AAA reports that the average retail price in the Stamford area is $4.52.
FEDERAL AND STATE TAXES
There are both federal and state excise taxes on gasoline. The federal tax is 18.4¢ per gallon and the state excise tax is 25¢ per gallon.
The state also imposes the Petroleum Products Gross Earnings Tax at a rate of 7% of the wholesale price of gasoline. The rate is scheduled to increase to 7.5% on July 1, 2008. On June 3, the wholesale price of gasoline in New Haven was approximately $3.57 per gallon for regular RFG. The tax on a gallon sold at wholesale for that price is 24.99¢.
When the state taxes are added, they add 49.99¢ to the cost of gasoline. When federal and state taxes are added, they add 68.39¢ per gallon to the cost of gasoline.
When the gross earnings tax is increased on July 1 to 7.5%, it will increase the cost of regular RFG by 1.8¢ in southwestern Connecticut, if the New Haven wholesale price remains the same. This represents an increase of almost 4/10 of a percent, based on AAA's average retail price.