Why Do Gas Prices Vary So Much, State by State (And Even One Block to Another)?

Jim Motavalli

Jim Motavalli | Aug 04, 2016

Why do gas prices vary so much from state to state, and even from region to region? I’ve seen it up close. Around Jacksonville, Florida, last week I saw $2 a gallon and even lower. This week I saw $2.40 in Connecticut and $2.25 in New York’s Hudson Valley. In New Jersey, where pumping your own gas is forbidden, prices are noticeably lower than across state lines.




South Carolina has prices that are the lowest in the nation, and can be $1 a gallon less than in California, where they’re legendarily high. GasBuddy.com reports the lowest prices by state, and right now South Carolina is in the lead at $1.81 for regular, followed by Alabama ($1.86), Tennessee ($1.87) and Mississippi ($1.89). A reason to start whistling “Dixie”?
The highest prices are paid by our friends in Hawaii ($2.73) and California ($2.68). Prices are high in Alaska, despite producing the stuff—$2.57.  
The Energy Information Agency explains that it’s location, location, location. “Retail gasoline prices tend to be higher the farther gasoline is sold from the source of supply,” the agency said. “These supply sources include refineries, ports, and pipeline and blending terminals. Transportation costs also increase prices based on the distance from the source of gasoline supply.”
The Motley Fool will tell you it’s about taxes, distribution and marketing, refining and the price of crude oil. “About half the price is derived by the value of crude oil, followed by refining at 22 percent, taxes at 17 percent, and distribution and marketing at 10 percent. Because crude oil is traded on the global marketplace, it doesn't have a lot of impact on the difference between gas prices by state. In fact, top oil-producing states like Texas and North Dakota aren't among the states with the lowest gas prices because crude isn't the biggest driver of state-by-state difference.”

OK, I’ll buy that, but I got more interesting answers from Dan Berkovitz, former general counsel of the U.S. Commodity Futures Trading Commission. Around Washington, D.C., where he lives, a station might have $2.20 a gallon gas, but one a mile away, in a wealthier neighborhood, is $3. Why?  
Contrary to popular belief, Berkovitz said, evil oil companies don’t sit around conference tables to plot how to gouge consumers. OK, maybe they’re inclined that way, but they don’t actually control America’s network of 110,000 gas stations—many of them, though they may say “Exxon/Mobil” on the pumps, are owned by local chains or third parties.
“Local gas stations may subscribe to a price service that tells them what they can charge, based on their competitors’ prices, and their margins,” Berkovitz said. “They get an email once a day.”
Fascinating. A gas station heading into town on a commuter route might charge a few cents more than one on the other side of the road, because harried consumers who are late for work won’t sweat the difference—they need gas now.

Some people will drive miles out of their way to pay two cents a gallon less at an independent retailer. These people are known as cheapskates, and gas stations accommodate for them. If charging a few cents more loses them X customers, they’ll still make up for it from those who don’t give a darn.
Let’s look at the bigger picture. There’s a glut of oil on world markets. Oil prices have fallen precipitously because of that, though gasoline prices—while down—haven’t fallen as much. Refiners are still producing a lot of gasoline, but if they reverse course that could drive prices up again.
Brent Crude is at $42 a barrel now, and experts think it may eventually go back to the $50 or $60 range—definitely not up to $100 again.
One major reason prices vary in the U.S. is the difficulty of getting the product into the market. The delivery methods are regionally determined. In the Northeast, oil is often imported from Europe, an expensive process, or piped in from Louisiana via the Colonial Pipeline. Midwestern markets get oil pumped up from the Gulf of Mexico. California prices are high, at  least in part, because it’s a difficult market to reach.
Oil quality is also a factor. Sweet crude from the Gulf is low sulfur, which means it costs less to refine—and is subsequently lower priced at the pump. Canadian oil, from Alberta tar sands, is the dirtiest of all fossil fuels and needs a lot of refining. At today’s low prices, it’s hardly worth extracting, but that’s another story.
Finally, there’s who’s selling gasoline. Convenience stores might be posting lower prices because for them fuel is a loss leader and not a profit center. “It used to be gas stations with attached convenience stores,” said Berkovitz. “Now it’s the other way around.”
So, the bottom line is, should you drive out of your way to find the lowest prices? You bet! Car Talk readers are cheapskates, aren’t they?

Here are gas prices explained on video by a pair of bears, who know as much about this stuff as anyone:


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