Oil only accounts for half the cost of a gallon of gas. Here’s where the rest comes from.

The recent oil supply shock resulting from the Iran war has had a direct impact on the prices Americans pay at the gas pump, with prices increasing by an average of around 60 cents since the conflict began on February 28. But how exactly does the cost of oil play a role in determining gas prices for consumers?

According to Patrick De Haan, a petroleum expert at GasBuddy, the price of oil, being market-driven, is the primary factor influencing gas prices. Despite the U.S. being the largest crude oil producer globally, domestic gas prices are more closely tied to the cost of Brent crude, the international benchmark, rather than West Texas Intermediate, the U.S. benchmark, as reported by the Energy Information Administration (EIA).

Ehud Ronn, a professor at the University of Texas at Austin’s business school, explained that retail gasoline prices reflect the crude costs paid by refiners, with Gulf Coast refiners paying Brent-linked prices. Therefore, gas prices tend to track Brent crude rather than WTI.

As of now, a barrel of Brent crude is priced around $100, representing a 38% increase from $73 just before the war began. This surge in oil prices directly impacts the cost of gasoline, which is derived from crude oil and goes through a refining process before reaching local gas stations.

Gas stations purchase fuel at market prices and factor in overhead costs and profit margins when setting prices for consumers. On average, stations earn around 30 to 35 cents per gallon, with margins tightening during periods of rising oil prices and widening when prices drop.

Currently, the average cost of gasoline in the U.S. stands at $3.63 per gallon, according to AAA data. The breakdown of gas prices includes crude oil accounting for 51%, refining for 20%, marketing and distribution for 11%, and state and federal taxes for the remaining portion.

State and federal taxes on gasoline vary across the country, with federal tax set at 18.4 cents per gallon and state taxes ranging from about 9 cents to as high as 70.9 cents in California. Seasonal factors, such as the transition to summer-blend gasoline and increased demand in the warmer months, also influence gas prices.

Overall, the cost of oil plays a significant role in determining gas prices for consumers, with various factors, including refining, distribution, taxes, and seasonal shifts, also contributing to the final price at the pump. Stay informed about these factors to better understand fluctuations in gas prices and how they impact your daily expenses.