Software & Finance

Personal Finance - Understanding Gas Prices

I have written an article on understanding gas prices.


As the gas prices are traded in the future market in the exchanges, we may think that the gas price per gallon might be consistent across all the states in USA. Nevertheless the opposite is true. If you live in Alaska, Georgia, Wyoming, New Jersey, S. Carolina, Oklahoma, Missouri, Mississippi, New Mexico, Arizona, Virginia, New Hampshire, you can be happy that you will be paying less gas price per gallon compared to the people living in other states. If you live California, New York, Hawaii, Connecticut, Illinois, Washington, Michigan, then you will be paying more for gas prices at the gas station.


Out of which, California being the worst, people living California are paying nation's highest gas price in USA. Alaska is the one who is getting gas at a very cheap price.


The reason why people in California are paying more for gas prices because,


  • Sales tax for gas prices are set to highest at 8.25% in the nation
  • 46.6 cents per gallon goes as California state gasoline tax
  • 18.4 cents per gallon goes as federal gasoline tax


As federal gasoline taxes are kept constant across nationwide, the two things screwing up here are sales tax and gasoline tax per gallon. At least in New York and Hawaii state sales are low even if gasoline taxes are at high.


The owner of the gas station are long on gasoline future contracts and they will get the delivery on the respective month of the contract. When the gas stations are at low inventory level on gasoline, they will buy more contracts. They can plan and buy in advance when the gas prices are trading at low levels. Current gas prices are at $2.1466 per gallon for the month of August 2010 as of 22nd July 2010. Gas station usually takes about 10% as their profit.


Let's do the calculation:


Gasoline Price:                          $2.14660

After 10% profit:                      $2.36126

After Sales Tax at 8.25%:       $2.55606

After Federal Gasoline Tax:      $2.74006

After CA State Gasoline Tax:  $3.20606


If you look at the above information, the gas stations are really making 0.21466 cents per gallon. But it may not be really true. They might be making sudden windfalls or losses if the prices suddenly make a big move in either direction after they made a large purchase. This is the risk of running the gas station as their business. With the above information, the expected price at the gas station by next month would be $3.21 per gallon as of today. If the gas futures are making significantly higher move, then gas stations will increase the price as it will increase their profits.


You may think that you may be unlucky if you live in California. However the statement may not be completely true. Because if you drink or smoke in California, you will get some discount as they taxes on Cigarette and table wines are low. For example, New Jersey charges more than 4 times (87.5 cents) in taxes for table wines compared to California (20 cents). Similarly Alaska charges $2.50 as tax for table wine.

What we can do is take advantage of the competition between the gas stations. One gas station might have purchase huge when the price was low, they can reduce couple of pennies compared to their closet gas stations to attract the customers.

The other options are paying by cash or debit cards or retail rewards cards at the gas station. We can use COSTCO wholesale as they have less state gasoline tax per gallon. Hence COSTCO would be able to sell around 10-15 cents less per gallon for gasoline compared to others. That's the only option left out for the consumers.  


Posted on July 23, 2010