Fuel Taxes

The biggest driver of recent gasoline price increases in the U.S. is supply lagging behind strong demand. Unfortunately, this is an equation that’s unlikely to yield significantly lower prices any time soon, with the growing economies of China and India requiring more and more petroleum products.

In the U.S., crude oil costs make up the largest portion of the retail price of a gallon of gas, with refining, taxes, and retail expenses rounding things out. Despite bombastic rhetoric about companies “gouging” consumers, federal and state governments actually “profit” more from each gallon of gas than the major oil companies do. It’s also important to remember all tens of billions of dollars in income, payroll, and other taxes that oil producers, gasoline refiners, retailers, and workers in these companies pay.

Our Gasoline: Where the Costs Go

Source: Average of gasoline components from January through September 2007 as reported by the Energy Information Administration. Average earnings from January through September calculated from Oil Daily.

Prices are not “set” by some group of CEOs in a corporate boardroom. Oil and natural gas are commodities traded in a global market, just like agricultural products and minerals. And, just like cattle or gold, oil and natural gas are subject to the price fluctuations that occur in free markets. Indeed, price-rigging is almost always the result of government meddling (such as OPEC), not conspiring companies.

Average Gas Tax, by Region

Source: American Petroleum Institute, January 2008 Report.

Prices for fossil fuels can also be influenced by perceptions about future supply and demand. Geopolitical tensions have been rising in major energy-producing countries such as Iran, Iraq, Venezuela, Chad and Nigeria. Similarly, concerns over naturally occurring phenomena such as hurricanes in oil producing areas can cause uncertainty among buyers and sellers. All of these realities are largely out of Americans’ control. Sure, we can plan for natural disasters, work to stabilize other nations, and even stockpile some resources, but growing economies and other factors will be with us for the foreseeable future.