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Why You Might Still Be Overpaying for Gas

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While gas prices as a national average are finally starting to fall, regional price differences remain substantial. Crude oil prices are still the largest determinant of gasoline prices, but a number of other factors make gas more expensive from state to state. And in some cases, even stations within a few miles of each other sell gas at very different prices. What's behind this rift?  

Location, location, location
U.S. oil production has been rising for three straight years. We're pumping out 6.15 million barrels a day, the highest output in more than a decade. So why haven't these gains translated to lower gas prices across the country?

The simple answer is that they've benefited some regions more than others. As with real estate, it boils down to location. Increased production generally tends to benefit those regions and states located closer to refineries, where crude oil is converted into gasoline and other fuels.

In addition, the price refineries pay for crude oil, known as the refiner acquisition cost, varies drastically from region to region. Last year, the average difference in regional refiner acquisition costs was an astonishingly high $23.78 per barrel, up threefold from $7.46 a barrel in 2010. What's the deal?

Brent vs. WTI
It has to do with the price and availability of crude oil. All crudes aren't made the same. As the price difference between the two major crude oil benchmarks, Brent and West Texas Intermediate (WTI), reached record heights, so did the gap in refineries' input costs.

Due to a combination of surging domestic production and a lack of sufficient transportation infrastructure, there's been a huge bottleneck in the nation's main oil storage hub in Cushing, Okla. As a result of the glut, WTI has been trading at a major discount to Brent over the past year or so. The WTI-Brent spread, which refers to the price difference between the two benchmarks, rose persistently in the first three months of this year, doubling from around $10 a barrel at January's end to more than $20 a barrel in March.

The gap in refining margins
This wide variation in input costs has led to huge differences in refineries' profitability. Thanks to easily accessible, cheaper inland crude, midcontinent refiners like HollyFrontier (NYSE: HFC  ) , Delek US Holdings (NYSE: DK  ) , and Western Refining (NYSE: WNR  ) have enjoyed stronger margins for much of the past year and a half.

On the other hand, East Coast refineries, such as those of Sunoco (NYSE: SUN  ) and ConocoPhillips (NYSE: COP  ) , forced to rely on more expensive crude imported from Africa and the North Sea, have seen margins dwindle. Several East Coast refineries were even forced to shut down in recent months. This reduced supply is part of the reason gas prices on the East Coast were relatively higher for much of this year.

And then, of course, there are differences in taxes across states.

According to the Energy Information Administration, taxes made up 11% of the cost of retail gas in April. While federal taxes have stayed constant at 18.4 cents per gallon since 1997, state-level taxes vary drastically.

For example, New York motorists had to shell out 67.4 cents in taxes per gallon, while for Alaska motorists, this number was just 26.4 cents. According to the American Petroleum Institute, New York, California, Hawaii, Connecticut, and Illinois imposed the highest taxes on gas in April.

All these taxes may seem overwhelming, but they're really not so bad in the grand scheme of things. Our friends across the pond have to shell out a whole lot more. For British motorists, duties and value added tax comprised roughly 60% of the price of retail gasoline. Now 11% doesn't seem that bad, does it?

Environmental regulations
In addition to taxes, environmental programs impact regional price differences. Some programs restrict fuel transportation and storage, while others require the use of more expensive "reformulated" gasoline, which contains additives to reduce carbon monoxide and other polluting emissions. California is a prime example.

California prices also tend to be higher and more volatile than other states' because few sources outside the state produce the unique blend of reformulated gas that is required there. In addition, gas prices in the Golden State have soared in recent months due to temporary refinery closures.

What about local differences?
But all these explanations still don't account for gas price differences between stations that are just a few miles apart. For example, earlier this year in Dallas, a Shell station was selling gas at $4.19 a gallon, while a Costco just a few miles away was selling it at just $3.39. The reason?

First, big-box stores like Costco and Sam's Club can afford to sell gas at a substantial discount because the benefits of drawing in more customers often outweigh the losses associated with undercutting their competitors. For Costco in particular, it's really about getting more people in the door to buy its merchandise. The allure of gas that's just $0.10 cheaper is enough to draw in huge crowds, a strategy that's worked quite well. In fact, some of the bigger stores, like Costco, actually saw more than a 15% increase in customer counts through selling heavily discounted gas.

While these factors are important, the price of crude oil is still the most important determinant of the price of retail gasoline. And as the price of crude fluctuates, so do several oil stocks. But one little-known company has found ways to profit regardless of the price of oil. It's an under-the-radar oil and gas equipment provider that's set to crush the market. You can read about it in The Motley Fool's special free report titled "The Only Energy Stock You'll Ever Need." Find out the name of this company before the market catches on. Click here to access your report – it's totally free.  

Fool contributor Arjun Sreekumar does not own shares of any companies listed above. The Motley Fool owns shares of Western Refining and Costco. Motley Fool newsletter services have recommended buying shares of Costco Wholesale. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2012, at 3:31 PM, jerryguru69 wrote:

    total fuel excise tax in calif:

    53.7¢ per gallon. So, if you fill up a 15 gallon tank, you will pay $8.06 in taxes. Good case to declare a fuel tax holiday, no?

    breakdown here:

  • Report this Comment On June 08, 2012, at 3:35 PM, gilbertmj2 wrote:

    Good article. Nice to see the tax aspect covered. Here in Richmond, just outside the city line the price drops by a good $0.10 due to taxes.

    Also there is some regulation (apologies for vagueness) that controls the actual 'breeds' and concoctions of gasoline throughout the US. If I recall correctly, that's why if there is a petrol shortage say, in Virginia, you cannot simply ship more gasoline over from Chicago.


  • Report this Comment On June 08, 2012, at 9:04 PM, Melaschasm wrote:

    The federal government has mandated something close to 40 different blends of gasoline, depending upon the zip code of the gas station.

    Requiring many different blends of gas adds between 25 and 60 cents per gallon, and occasionally even more in certain locations.

  • Report this Comment On June 09, 2012, at 6:55 PM, JGBFool wrote:

    "U.S. oil production has been rising for three straight years."

    Weird. I got a lot of emails a couple of months ago that said Obama was responsible for decreasing oil production in our country.

  • Report this Comment On June 09, 2012, at 7:09 PM, CMFSoloFool wrote:

    JGBFool, email spam is not trustworthy. Domestic oil production has been significantly going up, and some of the coastal refiners, like Valero and Exxon, are actually exporting millions of gallons of gas to other countries so they can make more money.

    Companies like HollyFrontier, which use inland sourced feedstock are able to produce refined products at way better margins because of the Brent/WTI spread, and because they are closer to the oil producing basins.

  • Report this Comment On June 10, 2012, at 4:36 AM, dividendgrowth wrote:

    "Weird. I got a lot of emails a couple of months ago that said Obama was responsible for decreasing oil production in our country."

    That's why it's never a good idea to believe in lunatic fringe groups.

    Current problem is that both coasts are getting expensive brent crude shipped in, while US production increase is restricted to mid continent.

    Therefore, US crude must be shipped through rail or even tankers to both coasts.

  • Report this Comment On June 11, 2012, at 6:44 AM, The1MAGE wrote:

    Actually the Obama administration has attempted to be in the way of oil production, with the Gulf drilling moratorium. But the actions keep getting struck down by at least one Judge.

    In fact in February a Judge found the Obama administration in contempt for continuing the moratorium after it has been struck down.

    A lot of the increase in oil is a result of better techniques at getting at oil, plus the massive increase in production of oil shale.

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