With gas prices up by $1, Americans want to know why

Answering your questions about why gas prices vary from state to state, why price changes at the pump happen so fast and what role do U.S. oil reserves play.

With gas prices up nearly a dollar a gallon since the U.S. and Israel attacks on Iran began, Americans are asking questions about fuel prices.

You want to know:
– Why do gas prices vary from state to state?
– How does the barrel price of oil affect prices at the pump.
– Why do price changes happen so fast?
– Doesn’t the U.S. have vast oil reserves? How vast are they?
– Why doesn’t the U.S. distribute those reserves when global prices increase?
– Is it cheaper to own an electric car?

Photo by Yassine Khalfalli on Unsplash

I live in Washington state and have traveled to Florida, Minnesota and Arizona over the past few months. The differences in gas prices in just those four states are pretty dramatic.

Washington is one of the top five most expensive places to buy gasoline. The other four are California, Hawaii, Oregon and Nevada.

A USA Today story last month, before the attacks on Iran, compared prices in those five states and explained the reasons for the differences. According to AAA, the average prices for regular gas in the most expensive states this week:

– California: $5.54
– Washington: $5.00
– Hawaii: $4.98
– Nevada: $4.61
– Oregon: $4.54
– Arizona: $4.35
– Alaska: $4.23

All the rest are still under $4. The reasons why gas prices are so different between the states and why this group is so much more expensive than the rest of the nation include: state taxes and fees, environmental regulations, distance from processing facilities to the pump, distance from supply, supply disruptions and retail competition.

According to the U.S. Energy Information Administration, gas prices seem to have regional differences. For example, West Coast prices are the highest and Gulf Coast prices are the lowest. These differences seem to center on distance from supply, environmental regulations and supply transportation challenges.

Prices in California are generally higher than other places because few refineries produce the gas that is allowed to be sold in that state because of California’s unique regulations that are more stringent than the federal government’s. California and Washington also have higher gas taxes.

This is the general outline. The exact differences are more complicated. If you want to dig deeper into the history of oil prices and the future, check out these posts by Paul Krugman: Oil crises past and present, Costs and Benefits from the New Energy Crisis and Oil Prices Could Go Much Higher. TL/DR: Gas prices are going to continue to go up across the United States.

From oil prices to gas prices

Like anything in the economy, the crux of the issue is supply and demand. Because of the U.S.-Israel war with Iran, the Strait of Hormuz is virtually closed off and according to Krugman, about 20% of the global oil supply is behind that blockade.

The Federal Reserve Bank of Dallas offers a simple explanation of how crude oil price increases (and decreases) translate into changes at the pump. Alexander Chudik, a senior economist in the bank’s research department, explains that a $10 price increase in crude oil results in a 25-cent retail gas price hike.

And the changes happen really fast: “About 12% of a crude oil price increase is passed through to retail gasoline prices on the same day … gradually increasing to about 50% after 20 working days,” he writes. Why not 100%? Crude oil prices are not the only determinant of gas prices, otherwise gas would cost the same everywhere in the United States.

Thomas Weinandy, an economist at Upside, explains that gas prices are market driven and the market changes every day. Refineries and distributors buy and sell in global markets and their prices fluctuate depending on many factors, including the news of the day, the weather and whether oil companies can get tankers through the Strait of Hormuz.

Gas prices respond to these same factors but they are anticipating their wholesale costs as well as what moves they need to make to stay competitive in their city.

U.S. oil reserves

The United States has more than 83 billion barrels of oil in reserve, accounting for nearly 5% of the world’s total oil reserves. The U.S. reserves make up about 11 times the country’s annual consumption of oil, which means without imports, we would have enough oil to last about 11 years at current consumption levels and that doesn’t include oil that is still in the ground in its natural state.

Worldometer, which keeps track of these oil reserve numbers, says the United States consumes more than 20 million barrels of oil a day, which means we rank No. 1 in the world for oil consumption, accounting for 20% of the world’s daily oil consumption a day. We also produce more oil than any other country – about 22.8 million barrels a day.

Even though those numbers make it seem like we produce and store enough to be energy independent, the reality is more complicated. Apparently we both export and import oil because most of what the U.S. produces is not the kind of oil we usually refine and use. I’m not going to go into detail on this because it involves a lot of chemistry, but here’s an industry website that explains it in detail, if you’re interested.

Should we all just get electric cars?

This question is also complicated. While electric car prices have come down in recent years, not everyone can afford a new car or even an almost new one. The federal government’s $7,500 EV tax credit program has ended, so electric vehicles are not likely to be less expensive than a gas-powered car.

The National Resources Defense Council says that in addition to being better for the environment, electric vehicles are less expensive to operate and maintain. They cite these two studies as evidence: A 2018 study by the University of Michigan’s Transportation Research Institute found that the average cost to fuel an electric car was $485 a year, compared to $1,117 for a gas-powered vehicle. A 2020 Consumer Reports study found EV drivers tend to spend about 60 percent less each year on fuel costs compared to drivers of gas-powered cars.

The third factor is how much do you drive and how do you plan to keep your vehicle charged. While many states are building out their charging networks with support from taxpayer dollars, EV drivers still need to plan ahead if they are driving more than 100 miles from home. Skipping the gas station is fun and saves you money but there’s more to consider. And don’t forget public transportation, if you live somewhere it’s feasible. The public bus and train also do not require you to fill up at the pump.