Motor Fuels: Understanding the Factors That Influence the Retail Price of Gasoline

Few things generate more attention and anxiety among American consumers than the price of gasoline. Periods of price increases are accompanied by high levels of media attention and consumer questioning about the causes and impacts of the price changes. The most recent upsurge in prices is no exception. Between January 3 and April 11, 2005, gasoline prices increased nearly every week, and during this time the average U.S. price for regular unleaded gasoline jumped 50 cents per gallon, adding about $7.8 billion to consumers' total gasoline bill, or about $58 for each passenger car in the United States. Spending billions more on gasoline pinched consumer budgets, leaving less money available for other purchases. Beyond having concerns over price increases, consumers find it difficult to understand how prices can vary so much across the country or even from neighborhood to neighborhood. For example, consumers in San Francisco paid an average of $2.63 per gallon during the week of April 11, 2005, while consumers in Chicago paid $2.33 per gallon; in Denver, $2.25; in New York, $2.19; and in Houston, $2.12. Within the city of Washington, D.C., pump prices for regular gasoline varied by as much as 22 cents per gallon among the stations that we visited. Over the years, these issues have been the subject of numerous investigations and reports. We at GAO have testified multiple times on related issues in congressional hearings. Often reports on gasoline prices have been technical, leaving basic questions unanswered. We prepared this primer to help improve public understanding of the major factors that influence the U.S. price of gasoline and the challenges facing the United States on issues related to gasoline supply, demand, and prices. In the primer, we present information on the factors that influence the price of gasoline and, to the extent possible, why those factors have developed. Specifically, we explain how gasoline is made and distributed, what consumers pay for in a gallon of gasoline, why gasoline prices change over time, and why gasoline prices vary from place to place. The information is presented in a question-and-answer format and is written for a nontechnical audience.