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Making Sense Of Gas Prices

Gasoline prices have jumped above $3 a gallon in some parts of California and Hawaii, and may hit that level in other parts of the country when the busy summer driving season approaches. The price at the pump already is up nationwide more than 32 cents a gallon in just the last month. Just how are gas prices determined?

What Is The Average Gas Price?

Gas prices in the United States are lower than in other countries, but we've been reaching some national record highs. Click here to see gas prices in each state and here for CBS News' gas price patrol.

Why Do Gas Prices Rise And Fall?

There are many factors that contribute to the price at the pump, such as crude oil production quotas, location and "boutique fuel" requirements, speculation, refinery capacities, transportation and of course taxes.

Refiner Problems: People are driving more at the same time refineries are producing less. This time of year, refiners go into a maintenance period where they rejigger their refineries to be able to emphasize gasoline production. Several refineries have had some problem of some magnitude.

Speculation: Some experts and analysts have said the market's acutely speculative quality (investors get spooked whenever the global crude cost increases) has added a "fear premium" of $10 to $15 per barrel. A decade ago, just less than 100,000 futures contracts for light, sweet crude oil were sold in a typical day on the New York Mercantile Exchange. But on August 30, 2005, the day after Hurricane Katrina struck the Gulf Coast, more than 400,000 contracts traded hands.

Crude Oil Prices: In 2003, crude oil made up 44 percent of the cost of a gallon of regular gasoline. No country uses, produces and imports more energy than the U.S. Crude oil prices are set in response to worldwide supply and demand. OPEC pumps about 40 percent of the world's oil, primarily through state-run industries. The cartel is therefore able to play a significant role in setting world crude oil prices, by determining production levels for its members.

Sellers: In 2003, distribution and marketing costs and profits made up 14 percent of the cost of a gallon of regular gasoline. According to a 2002 Senate report, in the case of stations owned by major oil companies, the wholesale price is set in relation to a fixed markup for resale, usually between 7 - 10 cents per gallon. So, if retail gas prices change, the refiners, not the station operators, see the profit or loss. Independent owners set their own prices.

Taxes: In 2003, federal and state taxes made up 27 percent of the cost of a gallon of regular gasoline. Federal taxes are 18.4 cents a gallon; this is in addition to state and local taxes. Alaska has the lowest state tax, at 8 cents. It's followed by Georgia, at 7.5 cents plus 4 percent added sales tax. The combination of the excise and other gasoline taxes in Hawaii makes their state taxes the highest, at 36 cents per gallon. On the mainland, drivers in Nevada and New York are hit hardest, at 33 cents.

How Can You Cut Your Gas Costs?

While there's no simple solution, for now, there are some ways to cut back. Your biggest savings will always come from driving the smallest, most fuel-efficient vehicle.
  • Keeping your tires inflated to the proper pressure improves your gas mileage by around 3.3 percent.
  • Carpooling with just one other person can cut your costs in half, and on some roadways you'll gain access to special High Occupancy Vehicle (HOV) lanes.
  • Drivers who have cruise control should use it to help maintain an efficient speed. Using overdrive gears also saves gas and reduces wear on the engine.
  • Driving at speeds over 60 mph is not only illegal on many roadways, but every 5 mph you go over 60 mph wastes fuel at a rate equal to paying an extra 10 cents per gallon at the pump.

  • To Learn More About Gas Prices:

    • The U.S. government runs a database that gives this information by model and year; you can access it clicking here.

    • Follow gas-prices at

    U.S. Energy Information Administration

    • Check in with the Berkeley Institute of the Environment for their most recent research into fossil fuels and the environment.

    • The American Petroleum Institute.

    • The Energy Policy Act of 2005 (.pdf), signed on Aug. 8, 2005, by President Bush, mandates that that the U.S. uses about four billion gallons of ethanol this year in fuel.

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