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	Gasoline Prices... Everyone Has an Opinion, but What Are the Facts?
	by Pat Perez
	You've probably noticed that everyone has a strong opinion about gasoline prices. There is virtually no other commodity in the world that elicits such an emotional response. Just ask your neighbors and friends what they think about the price of gasoline and stand back. We all know that affordable gasoline is critical to maintaining our mobile lifestyles and personal economic wellbeing. We can't just stop buying gasoline when the prices get high, so we feel trapped and frustrated when this happens.
	One of the reasons we all have an opinion on gasoline prices is because they are posted on large signs for all to see everywhere we drive. In our city of Elk Grove, motorists can select from more than 20 different retail stations representing at least half a dozen major brands and "unbranded" independent retailers. Over the past several years, motorists have especially noticed significant gasoline price spikes posted on those large signs, sometimes reflecting daily price increases.
	Over the past three years, average California gasoline prices have soared from an average of $1.10 back in December of 2001 to well over $2.00 a gallon. After reaching an average peak price of $2.40 for regular gasoline in mid-October of this year, prices have fallen some 42 cents to $1.98. Motorists can now find gasoline below $2.00 per gallon in most areas. That's a savings of about $6.30 for each time you fill your tank.
	Before we look at gasoline prices in detail, it's important to understand how it is made and transported to your local service station.
	How is gasoline made and transported?
	Gasoline is one of many products made from crude oil. California has 13 gasoline-producing refineries that make "unfinished" gasoline. In Northern California, this unfinished gasoline is moved by pipeline from Bay Area refineries to storage terminals in Rancho Cordova and Sacramento, where it is blended with ethanol and a generic additive that helps clean fuel injectors. Proprietary fuel additives (such as "techron") are then added to "branded" gasoline destined for particular retail outlet chains, such as Shell or Chevron. While the practice of adding these generic and branded additives has been around for about as long as gasoline has been sold, the blending of ethanol into unfinished gasoline to produce "finished" gasoline is a recent practice.
	At the stations, motorists can select from regular grade, mid-grade (which is mixed at the station) and premium grade gasoline. Premium grade gasoline has the highest octane level and its price level reflects both the additional expense of production (due to the higher octane requirement) and its limited availability.
	On the consumers' end, California's appetite for fuel now exceeds our ability to produce it in-state. During the summer driving season, for example, large amounts of unfinished gasoline and blending components are imported to meet the high demand. This is a relatively new development. While it is true that California refineries export gasoline to Nevada and Arizona (and sometimes the Pacific Northwest), these exports have more to do with the oil companies using their California-based operations as a transfer point to reach the inland markets.
	What is included in the price of gasoline? How much do taxes contribute to the price of gasoline? Why are gasoline prices high? And, how does demand for gasoline affect price?
	What is included in the price of gasoline?
	A number of factors influence the cost of producing and distributing gasoline to motorists. Crude oil is the raw material for making gasoline. Its cost and the cost of processing oil are often the most important variables affecting the price of gasoline at the pump. At the same time, retail gasoline prices reflect taxes and other costs such as marketing, transportation, and profits (and at times losses).
	During 2004, oil prices reached record levels, approaching $55 a barrel (42 gallons) in October. This is up about 40 percent from the previous year. Oil costs account for about one-half of the cost of a gallon of gasoline. Generally, for each dollar increase in the price of oil, one can expect a 2.5 cent increase in the price of gasoline.
	How much do taxes contribute to the price of gasoline?
	Taxes make up the next major component of retail gasoline prices. Federal, State and local taxes add about 48 cents to the final price of each gallon of gasoline purchased at the pump. Federal excise taxes are 15.4 cents; state excise taxes are another 18 cents, while other taxes (including county and city sales taxes) add an additional 15 cents to the retail price. Overall, taxes account for about one-fourth of the cost of each gallon of gasoline.
	Other factors that contribute to the price of gasoline include refinery costs, shipping and transportation, and retail dealer costs such as rent, advertising, wages, utilities, and profits. Costs and profits (and losses) will vary between areas. Refinery and dealer profits and costs make up about 25 percent of the cost of a gallon of gasoline.
	What happened to gasoline prices in 2004?
	As we enter the New Year, gasoline price continue to fall. Gasoline prices have dropped for 11 consecutive weeks and may continue falling, barring any major supply problems or significant increases in the price of oil.
	Gasoline prices have been volatile over the last several years and especially in 2004. Oil prices remain high throughout the world, although prices have dropped below $50 per barrel. Despite higher oil prices, demand for gasoline and other petroleum products continues to rise.
	On the supply side, California refineries have experienced numerous processing and distribution problems resulting in reduced fuel production throughout the state and elsewhere. Refineries typically perform routine maintenance during the winter season when demand is lower. Routine maintenance is planned for in advance, similar to taking a vehicle to your local mechanic for an oil change or tune-up. In planning for these events, refiners will tend to stock up on various fuels to offset their production losses. This does not generally drive up prices. What does tend to affect retail prices are unexpected, unplanned problems that are identified during routine inspections. When this happens, refiners must find gasoline on the open market and that can get expensive, as traders will take advantage of "deep pocketed" companies if they can. This was very much the case for much of 2004.
	Adding to all of this activity is the fact that only a handful of refineries in the world can make gasoline that meets California's fuel standards. California's gasoline is the cleanest in the world and more expensive to produce. A cargo of gasoline obtained from abroad can take as long as four to six weeks to reach our shores. During a "tight" market, when suppliers have limited means to meet our needs, prices can increase rapidly, especially if gasoline inventories are low.
	And finally, let's not forget the pipelines that deliver gasoline from the refining centers to the outlying terminals. There are several major pipelines that transport fuels throughout California and at times these were also shut down for precautionary weather-related reasons or for repairs. This caused distribution challenges for moving gasoline. These incidents also contribute to regional price spikes affected by the reduced deliveries.
	How does demand for gasoline affect the price?
	Can we make a difference?
	Throughout 2004, citizens looked at ways to reduce their gasoline consumption—usually through improved maintenance and checking their tire pressure. Many people took the next step and made fuel economy a higher priority in their new car purchase decision. Hybrid vehicles were so popular this year that there are long waiting lists. More carmakers are offering hybrid vehicles and in a greater variety of body styles. In Elk Grove's auto showrooms there are hybrid sport utility vehicles as well as passenger cars. And the city of Elk Grove has unveiled their new fleet of hybrid busses.
	But demand for gasoline and diesel continues to grow faster than our ability to produce and distribute it. In this situation, the price is supported because there is always a buyer. So taking action to improve fuel economy and maintain the vehicle affects the price of gasoline. New or expanded refineries and larger storage and distribution systems may be needed too.
	As you may have guessed, the journey from the oil fields to the retail pump is full of challenges. Perhaps instead of asking why gasoline prices are so high, we should be thankful they respond to market forces in a systematic and generally predictable way just like other heavily traded commodities, stocks and agricultural products such as vegetables, fruits, wheat and corn.
	The one important difference between gasoline and other commodities, however, is that when gasoline prices rise, motorists are limited in their ability to switch between fuels, while consumers can substitute easily between food products at a grocery store when prices change. While it's not a big problem to switch from strawberries to apples when berry prices rise, most of us have very few options to fueling our vehicles. At least that's my opinion. My neighbor, however, remains unconvinced. What do you think?
	Pat Perez is the Manager of the California Energy Commission's Transportation Fuels Office. His views and opinions expressed in this article do not necessarily represent the views of the California Energy Commission, the State of California, or the Elk Grove Insider.
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