When gas prices go up, everyone is affected. But what many people don't realize is that when gas prices go up, it doesn't mean that your local convenience store or service station is making more money on gas sales. Far from it. Typically, stores actually make less money on a sale as prices go up, because they don't pass along all of the price increases to their customers. The gasoline you put in your tank is the end product of a very long supply chain, with the gas nozzle at your local retail outlet the last link. Let's look at what goes into the price of a gallon of gas, the factors that cause prices to go up and down and why the price can vary from town to town, street to street, even block to block.

What Makes Up the Cost of Gasoline?

When you buy a gallon of gasoline, what are you paying for? Here's a breakdown of the four biggest cost factors:

* Cost of crude oil is about 48% of the price. * Federal and state taxes make up about 23% of the price. (In Tennessee the combined state and federal tax is 39.8 cents per gallon, so when you buy 10 gallons of gasoline you're paying about $4.00 in state and federal tax.)
* Refining costs and margins is about 18% of the price.
* And all other distribution and marketing costs are about 12% of the price. This includes transportation, storage, credit card fees (typically 2 to 4 percent), cost of doing business, sales taxes, and the retailer's gross margin.

Actually, nearly 90 percent of the cost of a gallon of gasoline is determined before it even reaches your local convenience store or service station.

What Makes the Price Go Up and Down?

There are usually two factors behind a fluctuation in gas prices: a change in the price of crude oil, or an imbalance in supply and demand.

Price of Crude Oil: Crude oil prices are determined by the world market. OPEC has the greatest potential to affect prices, since it controls about 40% of the world's oil production and 67% of the world's crude oil reserves. Other factors can also affect the price of crude oil, such as supply disruptions caused by overseas events or natural disasters, or even rumors or speculation of potential shortages. A change in world crude oil prices can lead to a change in the wholesale price for gasoline that your local retailer pays to provide you with fuel. Retailers must react to these wholesale price changes, changes they have no control over and, in today's electronic world, are communicated, and often times placed into effect nearly immediately, sometimes several times a day.

Supply and Demand: Crude oil is "refined" into several different fuels and oil-based products, such as gasoline for automobiles, diesel fuel, heating oil, jet fuel, or chemical products. Changes in demand of any of these crude oil-based products can affect gasoline prices. Weather also has an impact - demand for gasoline increases in the spring and summer months as people drive more. However, this increased demand also increase prices for crude oil, much the way more bids for an auction item increase the price. In addition, government regulations affect the price you pay at the pump. Here's how:

Boutique Fuels: Twenty years ago there were only four different kinds of motor fuels required in the U. S. Today, there are close to 30. Over the past decade, various federal, state and local fuel requirements have required retailers to sell new formulations of gasoline that address different air quality concerns across the country. These formulations are known as "boutique" fuels. While these regulations were aimed at reducing air pollution, they have also had the effect of placing tremendous pressure on the nation's refining and distribution system, and make it more likely that areas with unique fuel requirements could see supply shortages and temporary price spikes. In addition, many areas of the country require different fuels for summer months. (In Tennessee, six counties....Davidson, Rutherford, Sumner, Wilson, Williamson and Shelby... are required to sell one type of gasoline; but in the other 89 counties, another type can be sold.) This means that existing supplies of winter fuels must be completely exhausted, making it more likely that there will be temporary supply shortages. Everyone in the petroleum industry is proud of their role in helping reduce emissions, but consumers also need to understand that the proliferation of "boutique" blends impacts prices.

Capacity: The United States has a petroleum refining system running at close to capacity, and a pipeline distribution system that was designed to handle fewer different types of fuels. As a result, the system for getting fuels from refiner to retailer has little room for error - a problem at a refining plant, a break in the pipeline, or any other unplanned disruption can leave any part of the country in short supply. Also, government regulations have made it harder for the refining industry to expand. In 1980 there were 320 oil refineries operating in the U. S., there are now only 150 refineries. In fact, the last new refinery was built more than two decades ago, in 1976. Meanwhile, domestic gasoline consumption has increased by 39%.

Why Do Different Stores Charge Different Prices?

Your favorite convenience store or service station might sell its own brand of gasoline, or it might not have a brand associated with its gasoline at all, or it might carry the brand of a major oil company. One store might buy its gas on the open market, while another might be a part of a long-term arrangement with a major brand. What does this mean to consumers? It means there is a lot of tough competition for your fuel dollar. Most convenience stores and stations buy gasoline, which is later sold to you, from a wholesale "rack," a terminal run by an oil refining company. The wholesale price of gasoline changes often, sometimes several times in a single day. Retailers try to match these changes, because they're concerned with buying more gasoline tomorrow to replace the gasoline they sell today. That way, they can keep their tanks full and be able to service their customers. If the store can't buy gasoline, the pumps close, and customers go elsewhere. Not every convenience store or station you visit is in the same situation. It might be paying more or less for fuel than another store, or it might have to sell special kinds of anti-pollution gasoline required by law, or it might be in a high-volume location like a major highway. The result: prices that differ from place to place.

Knowing What Is Behind the Prices

Your favorite gasoline retail store is part of a unique business. In no other business are prices posted in gigantic numbers on the side of the road. Everyone in town knows the price of gasoline today....and you can be assured that our industry and the members of the Tennessee Oil Marketers Associations are doing everything we can to stay competitive and stay in business. By understanding gasoline prices, you can make more informed choices about your money.

Information provided by the National Association of Convenience Stores, with resources from the U. S. Energy Administration, U. S. Department of Energy, U. S. Federal Highway Administration, the American Petroleum Institute, and the Tennessee Oil Marketers Association.