How is it that my price per gallon of gasoline drops 70 cents when a barrel of oil has dropped only $10 for 55 gallons, as it did late last summer? Or that the price is up 20 cents a gallon over the holidays––heck, overnight––when the price of oil is virtually unchanged?
Trying to equate the price of oil to the price of gasoline is almost like trying to draw conclusions about the price of a sweater based on the cost of sheep. Oil prices on a per-barrel basis make up only a portion of the cost of a gallon of gasoline, albeit a big part. But much of the cost of fuel at the pump extends far beyond the oil itself. The price of gasoline can be affected by a variety of factors.
The first problem with the above question is that a barrel of oil in the petroleum world is 42 gallons, not 55––so it’s important to figure the percentage change on the correct quantity. Second, the combination of taxes, refining, and distribution costs also figure into the equation.
Jeff Haase, an energy industry analyst with the Minnesota Department of Commerce, notes that on a national basis, the cost of crude oil accounts for 57 percent of the cost of a gallon of gasoline. As of this writing last November, the cost of crude oil as a percentage of the overall cost of a gallon of gasoline in Minnesota was much higher––64 percent.
Why? Especially given that the average cost of a gallon of gas is lower in Minnesota—$2.20 last November, versus a national average of $2.56 the same month?
Although gas prices fluctuate due to many factors, the answer is mostly in the cost of distribution. Gas prices are lower in Minnesota because the refineries providing most of the state’s supply are in close proximity to the majority of the state’s population in and around the Twin Cities. In addition, 80 percent of the crude oil processed at the refineries is shipped a short distance from Canada.
“When we look at where our crude oil stocks are right now, they haven’t really changed that much from a year ago,” Haase says. “It’s not our ability to get oil, it’s our ability to refine it.”
Even though Minnesota has two refineries and the state’s supply pipelines were unaffected by Hurricane Katrina, the storm temporarily knocked out 90 percent of the Gulf of Mexico’s refining capacity. This caused a national shortage of gasoline, resulting in higher prices at the pump. Weather, and anything else that can impact refining capacity—a list that can include explosions, scheduled maintenance, and equipment failures—can have a disproportionate effect on gas prices.
This brings us back to this past fall, when prices plummeted. A mild hurricane season forecast suggested fewer threats to the nation’s refining capabilities and prices dropped.
If there’s one thing we can’t control in Minnesota, it’s the weather. But we can control our usage and its impact on our personal finances. Drive less. Plan your trips. Ease up on the gas pedal. Buy more fuel-efficient cars. Use public transportation whenever possible. Ride a bike. And one of the most important gas-saving tips: Keep your car’s tires pumped up!
