Warren Martin, Executive
Director K.O.G.R.F. — Kansas Strong
In April, oil traded at historic lows nearly $40 below zero. Many assumed gasoline prices would follow and plunge to modern all-time lows. Several reports predicted gas would fall below $1 per gallon. However, it never came to be. Gasoline prices fell, but the price resiliency clearly shows crude oil is not the only driving force behind gas prices.
Gasoline’s base cost is not zero. Historically, gasoline prices have correlated with crude oil prices. When the price of crude goes up, gas goes up (and vice-versa). However, the correlation became much more divergent following the mass exodus of major oil companies selling off gas filling stations in the 1980’s. Three major factors contributed to this divergence in price correlation: taxes, competition and marketing/distribution costs.
The gas tax began in the 1920s. Most tax assessments in the United States operate on a percentage basis. When the consumable product goes up or down in price, the tax on the product adjusts accordingly on a percentage basis. This is not true with gasoline. It is tax per gallon regardless of price.
By 1933 a federal tax of 1 cent per gallon and Kansas state tax of 3 cents per gallon was in place. This slowly escalated into the 1980s when the federal tax jumped from 4 cents per gallon to 9 cents (state taxes jumped to 11 cents per gallon). It jumped again in in 1990, and again in 1993 to current levels. Today it stands with federal taxes at 18.4 cents per gallon and Kansas state taxes at 24.03 cents per gallon regardless of what the price of gasoline happens to be.
In other words, in Kansas, taxes account for 42.43 cents per gallon at the pump. With current gasoline prices at $1.64 per gallon, taxes account for 26% of the cost of gasoline.
The 1980s jump in tax rate and drop in crude oil prices lowered the profit margins on gasoline to the point many major oil companies decided to sell off their holdings in filling stations across the nation.
These stations were bought up by smaller independent companies leading to two consequences. It increased competition between competing stations. Thus, it increased the amount of money stations utilized to market their product. It also increased the cost of distribution.
This cost has consistently increased since the 1980s. Marketing and distribution of gasoline in 2008 accounted for 12% of the cost for gas. As of April 2020, marketing and distribution accounted for 46% of the cost per gallon. With gasoline prices at $1.64 cents per gallon, marketing and distribution account for 75 cents.
Refining costs add 3 cents per gallon or 2.4% at $1.64 per gallon. In total, taxes, refining, and marketing/distribution account for over 74% of the current cost. Crude oil only accounts for 25% at $1.65 per gallon.
Taxes, refining and marketing/distribution establish a more realistic baseline for gasoline right at $1.20 per gallon. Anything above that is dependent on the price of crude oil.
This constitutes a dramatic change in perception of gasoline prices. In the early 2000s when the average price of gasoline was $2.94, 61% of the cost was dependent on crude oil prices. Today, it accounts for 25% at $1.64 per gallon. As gasoline prices fall, Kansas local oil and gas producers are ones who take the cut.
As crude oil prices increase, gasoline prices will also rise. However, no matter what the price of gasoline, about $1.20 is not paying for the crude oil required to produce that gallon of gas. It is going to taxes, refining and marketing/distribution of that gallon of gas.
- U.S. Energy Information Administration, Gasoline and Diesel Fuel Update: https://www.eia.gov/petroleum/gasdiesel/
- U.S. Energy Information Administration, Federal Tax Rate: https://www.eia.gov/tools/faqs/faq.php?id=10&t=10
- Kansas Department of Revenue, Research and Revenue Analysis, Motor Vehicle Fuel Tax: http://rvpolicy.kdor.ks.gov/Pilots/Ntrntpil/IPILv1x0.NSF/ae2ee39f7748055f8625655b004e9335/fa9f71af6ca0cf5786256528006f7006?OpenDocument
- Crude Oil vs Gasoline Prices – 10 Year Daily Chart: https://www.macrotrends.net/2501/crude-oil-vs-gasoline-prices-chart
- US Federal Government Gasoline Tax Since 1933: https://www.thoughtco.com/history-of-the-us-federal-gas-tax-3321598