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Can Politicians Really Affect the Price of Gasoline?

EIA Gas CostsWith all the hullabaloo over the midterm elections, and the recent plummet of national gas prices, I kept wondering, Can politicians actually have an effect on gasoline prices?  I’ve heard people support and deny this inquiry, and since I can never let a question go unanswered, I did some investigating.

The short answer is, no, politicians do not have an effect on gas prices.  At least not a direct effect, but I’ll touch on that later.  The Energy Information Administration (EIA) provided a graph that illustrates the breakdown of the price of a gallon of gasoline.  Price is distributed into four main categories: the cost of crude oil; federal and state taxes; refining costs and profits; and distribution and marketing.

Cost of the Crude

It’s no surprise that the cost of crude oil fluctuates.  It depends on supply and demand, which we all learned about in high school economics class.  In case you need a refresher, I’ll explain.

Pretend you just flipped the calendar page to July and realize it’s time for the annual family road trip.  You map out a route from New York to Florida (about 1,200 miles).  Seeing as your minivan gets about 18 miles per gallon, you need about 67 gallons of gasoline to get there, and the same amount to get back.  See where I’m going with this?

Typically, demand for gasoline spikes in the summer months with the nice weather, summer vacations, and the traditional road trips.  Once September rolls around, the kids are going back to school, and your busy schedule becomes even more hectic, leaving no time for travel, and sending the demand for gas back down.

Tax on Gas

Personally, I’m not a fan of taxes, but there’s no way around them.  Federal, state, and local taxes play a major role in the price of gas.  According to the EIA, “Federal excise taxes are currently at 18.4¢ per gallon.  As of January 1, 2014, state excise taxes averaged 24.17¢ per gallon, and 12 states levied additional state sales and other taxes on gasoline.”  Depending on where you live, you may also be required to pay an additional city and county tax.

Taxes are here to stay, but could they ever fluctuate?  Jason Stevens, director of energy equity research at Morningstar, says yes.  “Gasoline prices could see a reduction if government taxes and regulations changed, as federal and state taxes make up (around) 10% of pump prices.”

The Refining Process

Not all oil is the same.  It is rated by its viscosity and by the amount of impurities it includes.  What’s known as “light and sweet” crude is in high demand because it contains fewer impurities and requires less processing by refineries to convert it into gasoline.  Thicker, heavier oil is cheaper, but it requires more refining to eliminate impurities and process it into the gas that drives the nation.  Keep in mind, refining costs vary between regions depending on the type of crude found in the area and the different gasoline formations required.

Distribution and Marketing

Distribution and marketing are a couple of behind-the-scenes expenses that we don’t think about too often.  Most gasoline is shipped via pipeline and tanker trucks to the stations where we fill up.  These gas stations can be owned by refineries or independent businesses.  These businesses make very little profit from gasoline sales, which is why they always encourage you to go in and purchase additional products.

Of these four cost categories, the cost of crude oil has the most direct effect on gasoline prices, which is why supply and demand is usually the reason for fluctuating demand.  Time of year, weather, and the type of car you drive can all affect demand, which brings us back to politicians…

It’s clear lawmakers have very little influence on refining, distribution, or marketing.  And the federal gas tax has remained at a solid 18.4 cents since 1993, having little affect on gas price fluctuations.  They can, however, make a difference on the demand for gasoline by creating incentives and encouraging the population to trade in for electric vehicles and hybrids.  With more EVs on the roads, the demand for gasoline will continue to drop, bringing the price down with it.  Of course, once you own an electric vehicle, you probably won’t care about the price at the pump anymore.

 

 

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