Four Pieces of Every Gallon and Why the President Controls the Fewest

Every American knows the price of gas. It is posted on a sign the size of a billboard at the corner, it changes while you sleep, and it is the one number in the economy that voters can read from a moving car. What almost nobody knows is what that number is made of. That gap is where politicians do their best work. A voter who does not know what is in the price will believe almost anything about who set it.

So let us do the dull and useful thing and take the price apart. The argument of this post is simple, and I will number it. One: a gallon of gasoline is the sum of four pieces. Two: the largest piece is the price of crude oil, and crude is set on a world market. Three: the other three pieces are shaped by policy, but slowly, and mostly not by the President. Four: a voter who understands the pieces can tell which promises are real and which are slogans. None of this is partisan. It is arithmetic, and arithmetic is the most conservative discipline there is.

Defining the terms

Crude oil is the raw petroleum pumped from the ground. It is sold by the barrel, and a barrel holds 42 gallons.

Refining is the industrial process that turns crude oil into gasoline, diesel, jet fuel and other products.

Distribution and marketing covers everything between the refinery gate and your tank: pipelines, terminals, trucks, the station owner's rent and margin, and the cost of running the pump.

Taxes are the federal excise tax, state taxes and, in some places, local ones, collected on each gallon.

The U.S. Energy Information Administration, the statistical arm of the Department of Energy, publishes a running breakdown of the retail price into these pieces. The shares move from year to year, but the structure is stable: crude oil is the largest share, often around half of the price, and refining, distribution and marketing, and taxes make up the rest in varying proportions. When crude is cheap, the other pieces loom larger; when crude spikes, it swamps them.

Piece one: crude oil, a world price

Crude oil is a global commodity. A barrel of oil sells into a single worldwide market, and the price is set by the balance of what the world produces and what it wants to burn. It moves on news from the Persian Gulf, on decisions made by producers' cartels, on the health of the Chinese and European economies, on hurricanes in the Gulf of Mexico, and on the speculation of traders who have never seen a barrel.

Here is the arithmetic that shows how much of your price this piece controls. Take a hypothetical case, clearly labeled: suppose crude oil costs $63 a barrel and gasoline sells at $3.00 a gallon. A barrel holds 42 gallons, so the crude cost per gallon is $63 divided by 42, which is exactly $1.50. That is half of a $3.00 gallon. It also yields a rule of thumb you can keep in your head: every $1 change in the price of a barrel moves the price of a gallon by about 2.4 cents, since $1 divided by 42 is a little under 2.4 cents. A $10 swing in crude, in either direction, is about 24 cents at the pump.

A refinery does not get a gallon of gasoline from a gallon of crude. A barrel produces a mix of products, and the Energy Information Administration says a 42-gallon barrel yields roughly 19 to 20 gallons of finished gasoline along with diesel, jet fuel and other products. The simplified arithmetic above is the standard way of illustrating the crude share, and the point stands: when the crude price moves, the pump price follows, with a lag of days to weeks.

Now ask what a President controls here. Not much. The United States became the world's largest producer of crude oil, a position EIA estimated it reached in 2018, because horizontal drilling and hydraulic fracturing produced a surge in output through the 2010s, much of it on non-federal land. Even so, American barrels sell at world prices. A President can influence the long-run supply by what the government allows and encourages, and can influence the short run by releasing oil from the Strategic Petroleum Reserve, whose history is told in From the 1973 Embargo to the 2022 Sale, a Strategic Petroleum Reserve Timeline. A release is a one-time addition to a market of roughly a hundred million barrels a day. Draining a bathtub into the ocean and announcing a lower sea level is about the right comparison, and the effect is measured in cents, not in dollars.

Piece two: refining

Crude oil must be converted, and conversion takes capacity. Refineries are enormous, expensive and heavily regulated, and the United States has far fewer of them than it did in the early 1980s, though the ones that remain are larger and run harder. When a refinery goes down for repairs, or a hurricane shuts down the Gulf Coast, the capacity to turn crude into gasoline shrinks, and the price of gasoline rises even if the price of crude does not. The difference between the price of crude and the price of the gasoline made from it is called the crack spread, and it is the refiner's margin.

Policy affects this piece in several ways. Environmental permitting makes it hard to build a new refinery, and few refineries have been built from scratch in the United States in decades, though existing ones have expanded. Fuel specification rules, discussed below, require refiners to make different blends for different places and seasons. And the Renewable Fuel Standard, in force since 2005 and expanded in 2007, requires that refiners blend increasing volumes of biofuels, with compliance costs that are passed along.

A fair-minded person should notice a trade-off here. Most of these rules were adopted to clean the air, and the air is cleaner, a story told in The Air Got Cleaner While the Economy Grew, and the Numbers Show How. The question is not whether the rules had purposes, but whether each one is worth what it costs, and whether the cost is visible to the voters who pay it.

Piece three: distribution and marketing

Between the refinery and the pump, gasoline travels. Much of it moves by pipeline, some by barge and tanker, and the last leg is by truck. The station owner pays rent, wages, insurance and electricity, and earns a thin margin on each gallon.

This piece is local, and it varies. A gallon in rural Mississippi and a gallon in downtown San Francisco are the same chemically but not in cost, because land, labor and regulation differ. For the voter, the useful fact is that the station owner is rarely the villain of the story. Retail margins on gasoline are famously slim, and when prices rise, a station owner is squeezed too. The man behind the counter did not set the price of crude any more than the waiter set the price of beef.

The most important policy lever in this piece is a 1920 shipping law. The Jones Act, formally Section 27 of the Merchant Marine Act of 1920, requires that cargo moved by water between two American ports travel on a ship that is American-built, American-flagged, American-owned and crewed mainly by Americans. Such ships cost far more to build and operate than foreign ones, and there are few of them. The effect on fuel is geographic. Gulf Coast refiners make most of the nation's gasoline, and pipelines carry it to much of the country, but where there is no pipeline, as in New England and the West Coast ports and in Hawaii and Puerto Rico, critics note that it can be cheaper to import fuel from abroad than to ship it from Texas on an American tanker. The law is defended as a matter of national security and shipbuilding, and attacked as a hidden tax on islands and coasts. The case is argued in The Jones Act, a 1920 shipping law that costs Puerto Rico and Hawaii. The Secretary of Homeland Security can waive the law temporarily in limited cases, such as national defense or when no qualified vessel is available, but only Congress can change it.

Piece four: taxes

Taxes are the piece that is written down. They are the most predictable and the most political.

The federal excise tax on gasoline is 18.4 cents per gallon. It has been 18.4 cents since October 1, 1993, when the last increase took effect as part of the 1993 budget law. That is the figure for gasoline; diesel is taxed at 24.4 cents. The money goes mostly into the Highway Trust Fund, which pays for federal highway and transit spending.

Two features of this tax deserve attention. First, it is a flat tax per gallon, not a percentage of the price, so it does not rise when the price of gas rises. A $3 gallon and a $5 gallon pay the same 18.4 cents. Second, it has not been adjusted for inflation since 1993, which means its purchasing power has eroded and the Highway Trust Fund has needed repeated transfers from general revenue to stay solvent. That is a reminder that a "gas tax holiday" or a gas tax increase is a decision of Congress, not the President, because the Constitution gives the power to lay and collect taxes to Congress.

States add their own taxes, and they differ widely: some are a few tens of cents and some are many more, set by state legislatures and often indexed to inflation or to the price. Some localities add more. The result is that two Americans who drive the same car on the same day can pay very different taxes on the same gallon. Anyone who wants the number for a given state should check the state's own revenue department, because the rates change.

Here is the arithmetic of a hypothetical. If a state's total tax were 50 cents per gallon on top of the 18.4-cent federal tax, the tax piece would be 68.4 cents, a little under a quarter of a $3.00 gallon, since 68.4 divided by 300 is 0.228. That is an illustration, not a statement about any particular state.

The steelman: "The President sets the price"

The strongest case for the contrary view deserves a fair statement, because it is not silly. It goes like this: a President's decisions on leasing, permitting, pipelines, regulation and diplomacy shape the long-run supply of oil and the cost of making fuel, and those effects are real. A President who opens federal land to drilling, approves pipelines and eases refinery rules lowers the future price; a President who closes land and adds rules raises it. And voters who see the price at the pump are entitled to hold the President accountable for the direction of energy policy.

That argument is partly right. Here is where it goes wrong.

One: the time horizon. A lease sale today produces oil years from now. Drilling a well, building the infrastructure, and getting the product to market takes time, and a pump price in any given month reflects decisions made long before. A President cannot be credited or blamed for this month's price on the basis of this month's policy.

Two: the world market. Even a big increase in American output is sold at a world price. It lowers the price a little by increasing total supply, but it does not give Americans a separate, cheaper oil market. That is why American consumers still felt price spikes when American production rose.

Three: most production is not on federal land. The boom of the 2010s took place largely on non-federal land, as described in How America Went From Importing Natural Gas to Shipping It Worldwide, where the federal leasing decision does not apply; the Congressional Research Service put the federal share of U.S. crude oil production at under 24 percent in 2017. Federal policy matters most for offshore waters, federal land in the West and Alaska, and for permitting that crosses federal jurisdiction.

Four: the rest is in Congress and the states. Taxes are set by legislatures. Fuel blends are set by the Environmental Protection Agency under statutes passed by Congress and by states under the Clean Air Act. The Jones Act is a statute.

The honest summary is that policy matters, and a President matters, but the President controls the least of the four pieces on the time scale at which voters feel it.

Where leasing and permitting do and do not move prices

It helps to be precise about what a pro-production policy can and cannot do.

• It can raise future supply. More leases, faster permits and approved pipelines increase the amount of oil that can reach the market over the following years. That puts downward pressure on the world price.
• It can lower costs of getting oil to market. A pipeline reduces the cost of moving crude compared with rail or truck, a comparison made in Pipe, Rail or Truck, Comparing the Ways to Move a Barrel of Oil Safely.
• It cannot override the world price. A single country, even the largest producer, cannot repeal a global market.
• It cannot reach the other pieces quickly. Refining capacity, blend rules and taxes each move on their own calendars.

A voter can use this as a test. When a candidate promises to lower gas prices by next summer, ask which piece the promise acts on and how fast. A promise about leasing is a promise about years from now. A promise about taxes can be kept quickly, but only if Congress or a state legislature acts. A promise to "bring down the price" without naming a piece is a slogan.

The fuel rules that make the map lumpy

One more feature of the price deserves attention, because it explains why gas costs different amounts in different places. Under the Clean Air Act, areas with ozone problems have required special gasoline: during the summer, the fuel must evaporate less, which means a different blend, called summer-blend, which costs more to make. The summer season for these rules runs through mid-September. Some areas, including parts of California, require their own special blends, which the market calls boutique fuels. The Energy Policy Act of 2005 froze the list of such blends to stop their number from growing, but the patchwork remains. The effect is to chop the national fuel market into regions, so that a refinery outage in one region cannot be quickly offset by shipping gasoline from another, because the fuel is not interchangeable. That is a source of price spikes that no President decided on and that few voters have heard of.

What a family should take from this

Treat the pump price as a story with four characters. The big one, crude oil, answers to the world. Two of the others, refining and distribution, answer to a mix of markets and rules that change slowly. The fourth, taxes, answers to legislators, and is the one you can find out about with a phone call.

That suggests a modest and useful civic program. Learn your state's gas tax and who sets it. Ask your representatives where they stand on the Jones Act and on fuel blend rules. And be skeptical of anyone, of either party, who takes credit for a price that fell or blame for a price that rose without naming the piece they moved. The founders designed a government in which the power of the purse belongs to Congress, as read in No Money Shall Be Drawn but by Appropriation, Congress's Power of the Purse, and the power over taxes on your gallon belongs there too.

The case in brief

1. A gallon of gasoline is four pieces: crude oil, refining, distribution and marketing, and taxes, and crude oil is usually the largest.
2. Crude is priced on a world market; at $63 a barrel it adds exactly $1.50 to a gallon, and every $1 change in a barrel moves the pump by about 2.4 cents.
3. The federal gas tax is 18.4 cents per gallon, unchanged since 1993, while state taxes vary, and only legislatures can change them.
4. Refining capacity, fuel blend rules and the Jones Act shape the other pieces, but on slow calendars and mostly through Congress, the states and the EPA.
5. Leasing and permitting can raise future supply and cut transport costs, but they cannot override the world price, so promises about this month's price deserve skepticism.

What you can do: look up your state's gas tax per gallon on your state revenue department's website, then ask your member of Congress whether the Jones Act and the federal fuel tax should be changed.