How Gas Prices Are Set: Crude Oil, Refining, Distribution, and Taxes

A gallon of gasoline is one of the most transparent products in the American economy, and one of the most misunderstood. Drivers see a single number on a sign, but that number is the sum of four very different businesses: crude oil production, refining, distribution, and retail. Each layer has its own costs, its own risks, and its own reaction speed.

This guide explains what is actually inside the price, using the same framework the U.S. Energy Information Administration uses when it decomposes retail gasoline prices.

The four layers inside a gallon

1. Crude oil — roughly half the price

Crude oil is the raw material, and it is usually the largest single component of the retail price. U.S. refineries price crude against benchmarks such as West Texas Intermediate (WTI), which settles in Cushing, Oklahoma, and Brent, which is priced in the North Sea.

Crude prices are set globally by supply and demand, OPEC+ production decisions, geopolitical risk, and the value of the dollar. A $10 move in Brent does not translate into a fixed change at the pump — the pass-through depends on refining margins and taxes — but over a few weeks it is the strongest single driver of the national average.

2. Refining — turning barrels into gallons

Refineries convert crude into gasoline, diesel, jet fuel, and dozens of other products. The spread between what a refinery pays for crude and what it receives for finished gasoline is the crack spread, and it is the refinery’s gross margin.

Two things make refining expensive in the United States:

• Specifications. Gasoline must meet federal and state fuel standards. Reformulated gasoline (RFG) is required in ozone nonattainment areas, and about a third of U.S. gasoline is RFG. California’s CFR gasoline is stricter still and cannot be substituted with fuel from other states.
• Seasonal blends. Summer gasoline has a lower vapor pressure (RVP) to reduce evaporation. Refineries must drain winter blend inventories and rebuild the supply chain every spring, which is one reason prices climb between March and May.

3. Distribution and marketing — the part nobody sees

Gasoline moves from refinery to terminal by pipeline, barge, ship, or truck, then from terminal to station by tanker truck. Each step adds cost:

• Pipeline tariffs are cheap per gallon but inflexible.
• Barge and tanker freight is more expensive and exposed to weather and port congestion.
• The final truck leg is the most expensive per mile and sets the practical radius of competition.

This is why geography matters so much. A station 200 miles from the nearest terminal pays more for the same wholesale product than a station next to it, and the difference shows up at the pump.

4. Taxes — federal, state, and local

The federal gasoline tax is 18.4 cents per gallon and has not changed since 1993. State taxes vary enormously:

• Some states charge a flat cents-per-gallon excise tax.
• Others index the tax to inflation or to wholesale prices, so it changes automatically.
• Some apply the general sales tax to gasoline on top of the excise tax, which makes the tax component rise when prices rise.
• Local governments add county and city taxes in some metro areas.

Nationally, taxes usually account for roughly 15 to 20 percent of the retail price, but the spread between the cheapest and most expensive states is large.

Why two stations a mile apart charge different prices

Retail pricing is local. Station owners consider:

• Replacement cost. Most stations buy fuel every few days. When the next delivery costs more, the sign changes the same day.
• Competition density. A corner with four stations has thinner margins than a highway exit with one.
• Traffic patterns. Stations that capture commuters can charge more because convenience has value.
• Payment mix. Credit card processing fees eat 2 to 3 percent of the sale, and stations price for the average customer.
• Brand and supply contracts. A station tied to a refiner’s branded supply may have less freedom on wholesale price than an unbranded station buying on the spot market.

Rockets and feathers

Pump prices respond asymmetrically. When wholesale prices rise, retail prices adjust within days. When wholesale prices fall, retail prices often take weeks to follow. Researchers have documented this “rockets and feathers” pattern in many markets.

The practical implication for drivers: a sharp weekly drop in crude does not mean you should wait to fill up. The station may not pass it through for a while, and the national average you see in the news lags the spot market by one to two weeks.

What actually moves the national average

Ranked by typical impact on the weekly U.S. average:

1. Crude oil price — the dominant input.
2. Refinery outages — hurricanes on the Gulf Coast, fires, and unplanned maintenance can tighten supply within hours.
3. Seasonal specification changes — spring transition to summer blend, autumn transition back.
4. Demand shocks — holiday travel, a sudden drop in commuting, or a recession.
5. Logistics disruptions — pipeline outages, port closures, and trucking shortages.
6. Tax changes — predictable but infrequent; some states index automatically.

How to use this when you fill up

• Track the weekly direction of your state average, not the daily noise.
• If your state is one of the nine with a published weekly average, use that number as your baseline.
• For everything else, use the regional PADD benchmark and assume a local spread of plus or minus 20 to 40 cents.
• Fill up before holiday weekends and before forecast hurricanes, when both demand and supply risk rise.

The number on the sign is not random. It is crude, refining, logistics, taxes, and local competition compressed into three digits. Once you know the layers, the weekly moves make sense.