Production Profit

Gas prices have crept up close to $3-5 a gallon and many people are feeling the pinch. Many consumers are frustrated with the increase, and are left wondering exactly how prices are determined and if anything can be done to offset the cost.

There is a common misconception that one person or entity is responsible for setting gas prices; but in reality it’s a much more complicated process.

So what, then, are factors that contribute to the cost? The overall price of a gallon of gasoline is based on the cost of refining crude oil, combined with taxes, distribution, the global market, and supply and demand.

Crude oil is the biggest component in the cost. Oil and natural gas producers find, extract, and provide the crude oil to refineries, which in turn refine the oil into gasoline. In the summertime it costs the refineries more, because summer-blend fuel (which is required by the EPA during summer ozone season) is more expensive to produce. It releases less smog and pollutants into the atmosphere during the hot summer months. Different states, and even different counties, have varied rules for summer-blend fuel, which alters the production price for refineries.

After the cost of oil, the next largest price components in a gallon of gas are taxes, refining, transportation and distribution. Each of these increase in cost every year, which ultimately affects the price at the pump.

Simple laws of supply and demand also play a role. Summer months are known as a time people travel more, take family vacations and spend time visiting friends. When more people need gasoline, the price goes up.

Check out this video to learn more about how production profit works.

Download the production profit lesson plan below.