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August 09, 2017

Why do gas prices vary by state?

Few experiences are more frustrating--or, conversely, delightful--to drivers than witnessing a sharp change in gas prices when crossing a state line. Or, for that matter, witnessing a price sign change in what feels like an instant.

What's up with that?

Curious, we reached out to Frederic Murphy, professor emeritus at Temple University's Fox School of Business, who also happens to be currently researching oil consumption patterns from Riyadh, Saudi Arabia. 

Why do gas prices seem to vary so wildly from state to state? 

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Three pieces, or three factors that determine it. If you need the main factor it's petroleum gas taxes. So, the differences between New Jersey, Delaware, Maryland and Pennsylvania, in and around the Philadelphia metropolitan area, is just taxes. If you get into other parts of the country, they're more isolated and have fewer sources of gasoline and there are one or two suppliers that raise the prices considerably. And I said there was a third, and that's proximity to refineries. Some states, you have to move the gasoline quite a distance. So those people pay for it.

Is this a regional thing as well? Would regulations in cities maybe impact buying gas in a city versus a rural area?

In rural areas, there are fewer gas stations, and so if the owner of the gas station wants, they can charge more, because the driving distance between gas stations is higher. There's the less competition and refineries aspect, and the other thing is that a gas station in Philadelphia has its real estate taxes, wage taxes and all this. So, you can expect that, given higher costs, they would charge more.

Is there a reason prices at the gas station change so often and abruptly? I got gas today and overnight it had jumped 10 cents. You feel like you blink and you miss it.

That happens--gasoline prices jump up almost immediately as soon as crude prices jump on the New York Mercantile Exchange ... So, when the crude price jumps, everyone knows the mix of gasoline is going to be refined out of expensive crude, so even if it's mixed from cheap crude they charge the expensive price. And then when the crude price falls--and the main pricing is based in London--then it takes a week or two, or depending on where it comes from up to three weeks for the crude oil to get to the U.S. And because of that people keep prices high until the cheaper crude actually lands on U.S. shores.

I've read gas prices can be seasonal, too. That they spike in the spring. Any truth to that?

Yes. And why that is, is because the mix of fuels consumed changes between winter and summer. In winter it's heavy on heating oil and a larger share of home heating oil, so that makes it easier to produce gasoline. In the summer, there's no home heating oil consumed, so it's a larger share of gasoline in a barrel and it's harder to produce because it all comes from crude oil. They have to do more processing steps. And in the summer, they need to have more oxygenates to control the ozone, and that's your ethanol from corn.

Are there states notorious for cheap gas prices?

My bet is that Louisiana would have cheap gas prices, but it's been years since I've looked at the price in Louisiana.

Houston has the largest concentration of refineries in the country; it's a highly competitive market and Texas is notorious for low taxes. What Texas does is put a tax on natural gas and crude oil, the production of it, and they won't lower taxes elsewhere."

How are oil companies responding to fuel-efficient vehicles and electric cars flooding the market now?

Well, one thing it adjusts to is changing total levels of gasoline. I think electric cars are less than 9 percent of car sales, and the average life of a car is over 10 years now. Ten years ago, they weren't selling many electrics, so in terms of the fleet, electrics are probably no more than 1 or 2 percent.

But they are rising. The market is trending toward things like Tesla and electric cars.

Yeah, the market is way overpaying for Tesla. Tesla has some buzz now, but that's only because they're selling to wealthy people who want a lifestyle car. And even the Tesla 3 still falls in that category, they're just not as rich as the senior programmers in Silicon Valley.

You know, gas also seems like one of the few things left where you don't know its source. I can go to the gas station and have no idea if my gas came from Asia or down the road.

Crude oil comes from a lot of different places because they blend it. The main source of gasoline in the Northeast are feeding out from Texas and Louisiana, the Colonial Pipeline, that moves about a million barrels a day of product into the region. Then there are the Delaware Valley refineries and that's a mix ... [with] North Sea Oil, and then there's a refinery in Elizabeth, N.J. and a lot of product imports from Europe because Europe went Diesel, which they now deeply regret because of all the toxins. That means all their surplus gasoline gets sold off in New York Harbor. So, you get crudes from a lot of places, gasoline from a lot of places. And what they ship is not a fully formed gasoline--it's a gasoline less the ethanol that has to be added because you can't put the ethanol in and then transport it long distances because the ethanol absorbs water. The ethanol is blended fairly close to where the gasoline is sold.

And in general, gas prices have been steady for a few years now, but any sense of trajectory? What's the long game?

It's a fool's business to try and predict the price of crude oil. Everyone was saying "It's just going to go up, and up, and up" in 2007, and then I think it was 2009 when it dropped about $30 a barrel, and then went back up over $100 and everyone thought "Oh, we're back into the market of more than $100 per barrel for crude oil." But then Shale came in and everyone knew Shale was coming but didn't know it was such a big deal, and so much was going to come. Then it flooded the market and other countries started producing more oil, and the oil price crashed. So I'm, I hesitate to even try to begin to forecast the price of oil.

I imagine it also can't be a coincidence that when the recession hit gasoline did the opposite of what the average person expected and went down.

Definitely. You cut demand and price falls. The other thing is, even though there are a lot of SUVs, the fuel efficiency of U.S. vehicles is better than it would have been with the old efficiencies of old SUVs.

Anything to add? What should people know for their purchasing decisions? Does it matter where you get your gas?

It doesn't matter where you buy gas simply because the EPA regulates it so much that gasoline is gasoline. The only thing that differentiates gasoline is the detergent additives that are cleaning your injectors.

Are you in [Saudi Arabia] for research?

Along with being a professor emeritus at Temple, I'm a visiting senior research fellow at the King Abdullah Petroleum Studies and Research Center at Riyadh. So, we've developed computer models to help Saudis figure out what they want to do with domestic consumption of oil. And we've looked at a whole bunch of other energy questions as well.

Anything centered around climate?

There's work starting on climate change; the trouble is there's so much good work going on around the world, what can Saudi Arabia do? Other than solar. Saudi Arabia is going solar. You have all this desert--here's a fun fact: You have all this sun but the big problem is a lot of dust. It's so dry, the dust covers the solar panels and lowers their efficiency. 

So if anyone wants to do a startup to make a lot of money, figure out how to clean a solar panel cheaply in the desert.