How Gas Prices Are Set: What You Pay at the Pump and Why

Gas prices can change quickly, sometimes rising several cents a gallon in a week, and they vary widely from one state to another, and even from one corner to the next. Understanding what goes into the price you pay at the pump helps explain these swings and can help you find ways to save.

The four main ingredients

According to the U.S. Energy Information Administration, the retail price of gasoline is made up of four main components.

Crude oil is usually the largest share of what you pay. Gasoline is refined from crude oil, so when crude prices rise or fall, gas prices tend to follow.

Refining costs and profits cover turning crude oil into gasoline. Refineries process crude into a range of products, including gasoline, diesel and jet fuel. Refining costs can vary with the season, the type of gasoline required and refinery capacity.

Distribution and marketing cover getting fuel from refineries to gas stations through pipelines, ships and trucks, along with the costs of operating stations and the retailer’s profit.

Taxes include federal, state and sometimes local taxes. The federal gasoline tax is a fixed amount per gallon, while state taxes vary widely, and some states add sales taxes or other fees.

The share of each component changes over time. When crude oil prices are high, crude makes up a larger portion of the price. The EIA publishes regular breakdowns on its website.

Why crude oil prices change

Crude oil is traded on global markets, and its price responds to worldwide supply and demand. Several factors can push prices up or down. Production decisions by major oil-producing countries, including members of OPEC and its allies, can significantly affect global supply. Conflicts or instability in oil-producing regions can disrupt supply or raise fears of disruption.

Global economic growth affects demand. When economies are growing, demand for fuel tends to rise, while slowdowns tend to reduce demand. The value of the U.S. dollar matters too, since oil is generally priced in dollars. Inventories, weather events and investor sentiment can also play a role.

Why gas prices rise faster than they fall

Drivers often notice that pump prices seem to jump quickly when crude oil rises but drift down slowly when crude falls. This pattern, sometimes called rockets and feathers, has been studied by economists, who point to factors such as how retailers manage inventory and competition. Whatever the cause, it means falling oil prices may take a while to show up at your local station.

Why prices vary by state

State taxes differ significantly, which accounts for much of the price variation between states. Some states also require special fuel blends designed to reduce air pollution, particularly during summer months. These cleaner-burning blends can cost more to produce, and because fewer refineries make them, supply disruptions can have a bigger effect.

Distance from refineries and pipelines matters too. Areas far from supply sources may pay more for transportation. California, for example, has its own fuel standards, higher taxes and a relatively isolated fuel market, which help explain why its prices are often among the highest in the nation.

Seasonal swings

Gas prices often follow seasonal patterns. Many areas switch to summer-blend gasoline during warmer months. Summer blends are formulated to reduce evaporation and smog, but they cost more to produce, which can raise prices in spring and summer. Demand also tends to rise during summer driving season.

Unexpected events can cause sudden price spikes. Refinery outages, pipeline disruptions and hurricanes, particularly those affecting refineries along the Gulf Coast, can reduce supply and push prices up quickly in affected regions.

Diesel is different

Diesel fuel follows many of the same patterns but has its own dynamics. Diesel is used heavily by trucks, trains, farm equipment and for heating in some regions, so demand patterns differ from gasoline. Because diesel powers much of the transportation system, higher diesel prices can raise the cost of shipping goods, which can eventually affect prices throughout the economy.

Saving money at the pump

Gas price apps and websites let you compare prices at nearby stations, which can save several cents a gallon. Filling up at warehouse clubs or using grocery store fuel rewards programs can also lower costs. Some stations charge less for cash than for card payments, so check whether that applies.

How you drive matters too. Keeping tires properly inflated improves fuel efficiency. Removing excess weight from your vehicle, avoiding aggressive acceleration and braking, and observing speed limits can all improve gas mileage. Combining errands into fewer trips reduces total driving.

Regular maintenance, such as following your vehicle’s recommended service schedule, helps keep your engine running efficiently. And use the octane grade your owner’s manual recommends. Paying for premium gas in a car designed for regular generally doesn’t improve performance.