How Gas Prices Work, Explained Simply

Gas prices mostly reflect four things: the cost of crude oil, the cost to refine it into gasoline, the cost to move and sell it, and taxes—then they’re adjusted every day by local competition and seasonal rules. Put simply, when oil gets pricier or refineries are squeezed, pumps go up; when global oil eases and supply flows smoothly, prices fall. Here’s how the pieces fit together and why what you pay can change by the week and vary widely by city or state.

The Four Building Blocks of the Pump Price

Every gallon draws from a few core cost components. Understanding these helps explain most ups and downs at the pump.

• Crude oil: Usually the biggest slice (often 45–60% of the pump price), driven by global benchmarks like Brent and WTI, OPEC+ policy, geopolitics, and the dollar’s strength.
• Refining: The margin for turning crude into gasoline (the “crack spread”), affected by refinery capacity, outages, maintenance, and seasonal “summer blend” rules that make fuel costlier to produce.
• Distribution and retail: Pipelines, barges, trucks, storage, station operating costs, credit card fees, and small station margins. Supplier “zone pricing” and local competition also matter.
• Taxes and mandates: U.S. federal gasoline tax is 18.4¢/gal; states add their own excise, sales, and environmental fees. California and a few others add cap-and-trade and low-carbon fuel costs; ethanol and other biofuel credits also move prices.

Together, these elements explain why a national oil headline nudges everyone’s price, while local policies and logistics create gaps between neighboring markets.

From Oil Well to Pump: How a Price Is Set

Think of the final price as a ladder that adds cost rung by rung as fuel moves from the oil field to the nozzle.

1. Global oil price forms on futures markets (Brent/WTI), influenced by supply-demand, OPEC+ output decisions, sanctions, wars, and currency shifts.
2. Refiners buy crude and turn it into products; their margin (the gasoline crack spread) rises when capacity is tight or plants go down for maintenance.
3. Wholesale markets (e.g., New York Harbor, U.S. Gulf Coast, West Coast) set spot and “rack” prices suppliers charge stations; branded contracts often cost more but include reliable supply.
4. Fuel moves by pipeline and truck; suppliers may use “zone pricing” by neighborhood. Retailers then set the sign based on costs, nearby competitors, and whether they charge more for credit to cover card fees.
5. Taxes are added at various stages; the total shows up on the pump when you fill up.

Each step can nudge prices higher or lower; when multiple steps move in the same direction—say, oil and refining margins both jump—drivers feel it quickly.

Why Prices Differ by City, State, and Day

Seasonal rules

Summer gasoline must evaporate less to cut smog, which is harder and pricier to make. U.S. terminals switch to summer-grade around May 1; retail stations must sell it June 1 to September 15 in most areas. This seasonal shift, plus heavier summer driving, typically adds several cents to tens of cents per gallon in late spring and summer.

State policies and geography

State taxes and environmental programs create wide gaps: the federal tax is 18.4¢/gal everywhere, but state and local add-ons range from roughly 15¢ to 80¢+. California’s unique fuel specs (CARB gasoline), cap-and-trade, and low-carbon fuel standards add notable costs; the West Coast’s relative isolation means refinery outages bite harder. Regions tied to the Gulf Coast and major pipelines often run cheaper.

Competition and price cycles

Local competition can change prices street by street. In parts of the Midwest, prices follow “Edgeworth cycles”: sharp hikes followed by gradual undercutting. Nationally, prices often rise faster than they fall (“rockets and feathers”) due to inventory replacement costs and competitive dynamics, not necessarily collusion. Stations with high card usage or premium branding may post higher prices to preserve thin margins.

What’s Been Moving Prices Lately (2024–2025)

Recent pump moves reflect a mix of global and domestic forces. OPEC+ has been managing supply, keeping a floor under crude. Ongoing Red Sea disruptions since late 2023 have rerouted product tankers, raising shipping times and insurance costs. U.S. refinery capacity remains tight after pandemic-era closures and some conversions to renewable diesel, so maintenance or unplanned outages can widen gasoline margins quickly. Russia’s war in Ukraine and periodic product export limits affect global balances. On the policy side, biofuel credit prices (RINs) and West Coast low-carbon fuel credit swings affect regional costs. Meanwhile, EV adoption is easing long-run demand growth but hasn’t eliminated seasonal gasoline spikes.

Common Myths vs. Realities

These frequent misconceptions obscure how prices really form.

• “Stations set any price they want.” Reality: most earn modest per-gallon margins and follow wholesale costs and nearby competitors.
• “Presidents control gas prices.” Reality: policy can influence supply over time and SPR releases can nudge markets, but global oil and refining dynamics dominate.
• “Refiners are always colluding.” Reality: margins can surge when capacity is tight without illegal coordination; regulators investigate when necessary.
• “Oil is the only driver.” Reality: taxes, seasonal blends, shipping, and local competition can add or subtract dozens of cents.
• “Prices fall slowly because of gouging.” Reality: there is some asymmetry, but inventory replacement costs and competitive strategies often explain the lag.

Understanding these myths helps set realistic expectations for how fast and how far prices should move when conditions change.

How to Estimate a Fair Local Price

While exact pricing is complex, a quick back-of-the-envelope approach can frame what’s reasonable for your area.

1. Start with crude: divide the Brent or WTI price per barrel by 42 to get dollars per gallon of crude, then remember crude is usually roughly half the retail price over time.
2. Add refining and wholesale costs: in normal markets, tack on roughly $0.60–$1.00/gal for refining and wholesale differentials; more during outages or summer blends.
3. Add distribution/retail: plan for roughly $0.30–$0.60/gal to cover transport, station costs, and fees, varying by region and brand.
4. Add taxes: the federal 18.4¢ plus your state/local taxes (which can range from ~15¢ to 80¢+). Check your state’s current rates for precision.
5. Compare locally: benchmark against state averages from reputable trackers or apps; big deviations often point to temporary supply issues or unusual competition.

This method won’t match to the penny but can explain why your city is above or below the national average and whether a sudden jump looks justified.

Key Terms Decoded

A few phrases you’ll see in gas-price coverage are worth decoding.

• Brent vs. WTI: Global oil benchmarks; Brent reflects seaborne markets, WTI is U.S.-focused. U.S. gasoline tracks both, often leaning on Brent.
• Crack spread: The margin refiners earn turning crude into products like gasoline and diesel; when it widens, pump prices can rise even if crude is steady.
• RVP/summer blend: Lower-volatility gasoline required in warm months to reduce smog—costlier to make and distribute.
• Rack price: The wholesale price at a fuel terminal where distributors load trucks; a key input to a station’s daily price.
• RINs/LCFS: U.S. renewable fuel credits and West Coast low-carbon fuel credits; their prices influence regional pump costs.
• Zone pricing: Suppliers set different wholesale prices by neighborhood based on competition and logistics.

Knowing these terms makes pump-price headlines and market moves far easier to interpret.

Summary

Gas prices are a daily snapshot of global oil markets, refinery economics, logistics, taxes, and neighborhood competition. Crude oil is the biggest driver, but seasonal fuel rules, refinery outages, credit card fees, and state policies can add or subtract significant cents per gallon. In 2024–2025, OPEC+ supply management, shipping disruptions, tight refining capacity, and regional environmental programs have been the main swing factors. If you track crude benchmarks, add typical refining and local costs, and factor in your state’s taxes, you can usually anticipate where prices are headed—and understand why your city’s price isn’t the same as your neighbor’s.

What is the .9 after gas prices?

Gas stations passed on the tax straight to the consumer by tacking it on to the price of fuel that day. The tax wasn’t always nine-tenths of a penny. Sometimes it was a smaller fraction. But by the 1950s, gas stations started rounding up to the 9/10 pricing, “squeezing the buck as far as they can,” Jacobsen told CNN.

How does gas pricing work?

Petroleum prices are determined by market forces of supply and demand, not individual companies, and the price of crude oil is the primary determinant of the price we pay at the pump.

What actually determines the price of gas?

Key Takeaways. Gasoline prices are determined largely by the laws of supply and demand. Gasoline prices cover the cost of acquiring and refining crude oil as well as distributing and marketing the gasoline, in addition to state and federal taxes. Gas prices also respond to geopolitical events that impact the oil market …

How much does it cost to make 1 gallon of gasoline?

The cost to make one gallon of gasoline varies, but a significant portion (over half) is the cost of the crude oil, with refining and distribution/marketing adding further costs, and federal and state taxes the final major components to the retail price. The actual “making” cost, excluding taxes and retail markup, is difficult to pinpoint as it is highly dependent on market conditions but generally falls in the range of $0.40 to $0.70 for refining and approximately $0.50 per gallon for the crude oil. 
Here’s a breakdown of the components: 

• Crude Oil: Opens in new tabThis is the largest and most variable cost, representing a significant portion of the final price. 
• Refining: Opens in new tabThe process of converting crude oil into gasoline has its own costs for labor, utilities, and capital, with estimates around $0.40 to $0.70 per gallon. 
• Distribution & Marketing: Opens in new tabThis includes the transportation of gasoline to retail stations and the marketing efforts by companies. 
• Taxes: Opens in new tabFederal and state taxes are levied on each gallon, adding a fixed amount to the price. The federal excise tax is currently 18.4 cents per gallon. 

Key Factors Influencing Cost

• Market Volatility: The price of crude oil is subject to global supply and demand. 
• Location: Taxes and local market conditions vary by state and region, influencing the final price. 
• Seasonal Blends: Different formulations are required for summer and winter, which can affect refining costs. 
• Externalities: Some argue the true cost should also include the environmental and health impacts of gasoline production and use.