5 Things You Probably Didn't Know About the Price of Gas

Summer has arrived, and gas prices are on the rise. That's not surprising, but some of these facts are.

Jun 7, 2014 at 7:00AM

The summer driving season is upon us, and -- surprise, surprise -- gasoline prices are on the rise.

$3.75 for a gallon of gas? Not yet (in most places). But maybe soon. Photo: Wikimedia Commons.

After bottoming out at $3.19 per gallon in November, gas prices have bounced back sharply, and now average $3.65 per gallon, according to GasBuddy.com. But did you know that...

Location matters
In gasoline as in housing, what matters is location, location, location. There is no such thing as a single gas price. And indeed, the price of one single gallon of gas can easily vary by as much as $1 depending on where you buy it. In Lubbock, Texas, for example, deep in the heart of oil country, a gallon of gas can be had for as little as $3.34 today -- not far off the national lows recorded last winter. Hop a boat to Hawaii, though, and that same gallon of gas will run you $4.38 -- more than a dollar higher.

There's an unspoken discount available
Location isn't the only factor affecting gas prices, of course. Sometimes, you may find the same gallon of gas selling for two different prices at the same place. This happens when a gas station charges more for a gallon of gas purchased with a credit card, than it does for payment in cash.

In many (but not all) states, gas stations are forbidden from imposing surcharges on credit card purchases. This irks gas station owners, though, who work on exceedingly slim profit margins, and who see those margins contract even further with every "interchange fee" they have to hand over to the credit card companies.

Gas station owners do have one "out," however. Even in states which ban credit card surcharges, the law generally permits a gas station to post an advertised price for credit card transaction -- but then give a discount for paying with cash. From your perspective, of course, it works out to exactly the same thing: Two different ways of paying for gasoline, and two different prices. But in giving a "discount" for cash payment, the station isn't penalizing you for paying with plastic, but rewarding you for paying with cash. And apparently that's A-OK.

Oil and gas prices don't always move in sync
Speaking of prices, you've probably noticed that the price of oil -- usually reported in the day's financial news on the major networks -- has a curious relationship to the price of gas. When crude oil prices rise (a barrel of Brent crude costs about $109 today, by the way), gas prices tend to rise in tandem... but not always.

Sometimes, the price of gas rises proportionately to the increase in crude oil prices. Sometimes not as much. Sometimes more. And sometimes, even when crude oil prices drop, gasoline prices rise. Why?

There are a number of factors that combine to explain these phenomena. The easiest to understand -- and the reason you can't assume a drop in the price of oil will translate into cheaper gas at the pump -- is this simple fact: One-third of the cost of a gallon of gasoline has almost nothing to do with the price of the oil used to make it.

According to the U.S. Department of Energy, oil prices make up only 65% of the cost of a gallon of gas, on average. The rest of the price comes from refining costs (14%), taxes (12%), and distribution and marketing costs (10%).

Diesel's cheaper -- and costlier -- than gasoline
If you own a diesel-powered auto, you're bound to be even more flummoxed by the relationship between oil prices and "gas" prices. This is because crude oil costs make up even less of the cost of a gallon of diesel, than it does for gasoline.

According to the DOE, just 60% of the cost of a gallon of diesel derives from oil prices. The refining portion for diesel is lower -- just 12%. Taxes are equal -- also 12%. But distribution and marketing costs of diesel are higher, making up 16% of diesel's cost.

How does the station come up with that price on the big sign?
Taxes, distribution, marketing, refining, crude costs -- by the time all these factors filter down to you, at least you're left with one simple decision: See gas advertised at $3.65? You can buy it, or you can not. Maybe it will be cheaper tomorrow. Maybe the station down the road is selling it for $3.63. Can't hurt to check, right?

But consider the plight of the gas station owner. Unlike other retailers, he can't hide the price of his gas inside a store's walls, or behind the checkout counter. He has to weigh the many input costs, calculate what profit he needs to earn, and guess at the right price to charge -- then put that price right up there atop a sign, on display for all the world to judge.

Just about every gas station in the country follows this practice. It's accepted. Some states -- Florida and Michigan, for example -- actually require by law that gas stations display their highest prices on these signs, even if they offer cash discounts. Gas stations are almost unique in this regard, not merely permitted to advertise "good" prices to entice customers to enter the store -- but required to advertise both good prices and bad, and suffer the consequences. And if they guess wrong?

That's our final bit of trivia for the day: Most gas station owners, if they guess wrong and find the customers aren't biting, can haul out a ladder, change the price on the signboard, and get business going again in short order. One state, however, New Jersey, puts an added stricture on its gas stations: They're only allowed to change the price they charge once per day.

Got any other questions about gas pricing that have been nagging at you? Ask them below, and we'll try to dig up the answers for you.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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