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'Planet Money' breaks down the price of a gallon of gasoline

RACHEL MARTIN, HOST:

While inflation is still running hot in much of the economy, gas prices are falling fast. Sarah Gonzalez, with our PLANET MONEY podcast, recently tried to break down the price of gas cent by cent to figure out why it acts so strangely.

SARAH GONZALEZ, BYLINE: OK. Gas is going for just under $4 a gallon right now. That's the national average. So let's call it a clean $4. Severin Borenstein at UC Berkeley's Energy Institute says one thing has the biggest impact on gas prices, crude oil, which is the raw ingredient that makes up our gasoline. Right now, a barrel of crude oil is going for about $100.

SEVERIN BORENSTEIN: Well, let's say if a barrel of crude oil is $100, $2.40 of the price of the gasoline is paying for the crude oil.

GONZALEZ: So if you could put raw crude oil into your car, you'd only pay about $2.40 at the pump. But you can't.

BORENSTEIN: Well, yeah.

GONZALEZ: Right. OK. So now we have to refine the crude, turn it into gasoline. And if you've ever wondered what refining is, it is basically boiling oil and collecting the vapor. Doing that, Borenstein says, adds about 65 cents to our gallon of gas right now.

BORENSTEIN: And that's all the costs of the refinery equipment and labor, the profit they make and so forth.

GONZALEZ: So 65 cents for refining, plus $2.40 for the raw crude oil. We are $3.05 into our $4 gallon. Then we start adding taxes.

BORENSTEIN: Eighteen-point-four cents is the federal gas tax. And that has been the federal gas tax since 1993. It hasn't changed.

GONZALEZ: The federal gas tax goes to things like highway maintenance. So we are at $3.23 and four-tenths of a penny. Now the state taxes.

BORENSTEIN: State taxes vary enormously, but average in the United States, about 30 cents a gallon.

GONZALEZ: So we're at, like, $3.50-ish.

BORENSTEIN: Right. But we still haven't delivered the gasoline to the gas stations. And we still haven't paid to operate the gas stations.

GONZALEZ: This is the final step. And these numbers are harder to pin down, Borenstein says. It depends a lot on where a gas station is, in the middle of a city or the middle of nowhere.

BORENSTEIN: Land costs are different. And labor costs are different. But typically, that's going to add another 20 to 50 cents a gallon.

GONZALEZ: Which brings us to, at most, $4.03 and four-tenths of a cent. So that is our $4 gallon, which is lower than a few months ago, right? And we know why it's lower. Basically, for most of the pandemic, no one was driving. And the cost of crude oil went down to $0, and at one point, negative dollars. Oil and gas companies were like, ooh, at $0, it is not worth it to look for new oil or refine it.

RYAN KELLOGG: Yeah. The industry more or less stopped drilling.

GONZALEZ: Ryan Kellogg is an economist at the University of Chicago. Then, he says, two things happened. A bunch of people basically decided the pandemic was over, started driving again. And much of the world stopped taking Russian oil. Demand was up, and supply was down. Refineries couldn't keep up.

KELLOGG: Refineries at their maximum capacity.

GONZALEZ: Prices went through the roof. And there's a saying that the solution to high gas prices is high gas prices because it makes companies look for more oil and refine more. And this happened. When oil and gas prices hit record highs, companies found ways to refine more. And they decided to start drilling again. But Kellogg says, that takes time.

KELLOGG: You lay off a bunch of rig crews in 2020. Now it's 2022. It's not like those people are just sitting around, waiting for you to call them.

GONZALEZ: It's taken a while to get back to the pre-pandemic oil supply, but we're getting there, which is partly why prices have dropped. Also, people stopped driving over high gas prices. And that's the other way prices go down.

Sarah Gonzalez, NPR News.

(SOUNDBITE OF J DILLA'S "OVER THE BREAKS") Transcript provided by NPR, Copyright NPR.

Sarah Gonzalez
Sarah Gonzalez is a host and reporter with Planet Money, NPR's award-winning podcast that finds creative, entertaining ways to make sense of the big, complicated forces that move our economy. She joined the team in April 2018.