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Why Are Gasoline Prices Higher in Some Regions Than in Others?
Although price levels vary over time, average retail gasoline prices are often highest in certain States or regions. Besides taxes, there are other factors that contribute to regional and even local differences in gasoline prices:
Distance from Supply Usually Means Higher Gas Prices
Gas prices in San Francisco, California, in the summer of 2008, were the highest they have ever been.
Source: Stock photography (copyrighted)
Retail gasoline prices tend to be higher the farther it is sold from the source of supply: ports, refineries, and pipeline and blending terminals. About 67% of the crude oil processed by U.S. refineries in 2008 was imported, with most transported by ocean tankers. The U.S. Gulf Coast was the source of about 34% of the gasoline produced in the United States in 2008 and the starting point for most major gasoline pipelines, so those States farther from the refineries will most likely have higher prices.
Supply Disruptions Can Cause Run-up in Prices
Any event that slows or stops production of gasoline for even a short time, such as planned or unplanned refinery maintenance or the refinery shutdowns that occurred when the Hurricanes Katrina and Rita hit the Gulf Coast in 2005, can prompt bidding for available supplies. If the transportation system cannot support the flow of surplus supplies from one region to another, prices will remain relatively high.
Retail Competition and Operating Costs Play a Role in Pump Prices
Pump prices are often highest in locations with few gasoline stations. Even stations located close together may have different traffic patterns, rents, and sources of supply that influence their pricing. Drivers face a trade-off between stations with high prices and the inconvenience of driving further to find a station with lower prices.
Environmental Programs Add to Cost of Production, Storage, and Distribution
Some areas of the country are required to use special “reformulated” gasoline with additives to help reduce carbon monoxide, smog, and toxic air pollutants that result when gasoline is burned or when gasoline evaporates during fueling. Other environmental programs put restrictions on fuel transportation and storage. These programs tend to add to the cost of producing, storing, and distributing gasoline. About a third of the gasoline sold in the United States is reformulated. Each oil company prepares its own formulation to meet Federal emission standards.
Why Are California Gasoline Prices More Variable Than Others?
California prices are higher and more variable than prices in other States because there are relatively few supply sources of its unique blend of gasoline outside the State. The State of California’s reformulated gasoline program is more stringent than the Federal government’s. In addition to the higher cost of this cleaner fuel, there is a State sales tax of 8.25% on top of an 18.4 cent-per-gallon Federal excise tax and an 18.0 cent-per-gallon State excise tax.
California Refineries Running Near Full Capacity to Meet Demand
California refineries need to be running near full capacity to meet the State’s gasoline demand. If more than one of its refineries experiences operating problems at the same time, California’s gasoline supply may become very tight and prices can soar. Even when supplies can be obtained from some Gulf Coast and foreign refineries, they can take a relatively long time to arrive due to California’s substantial distance from those sources. The farther away the necessary relief supplies are, the higher and longer the price spike will be.