Conor here: The following article delves into the four primary components of gasoline pricing: the cost of crude oil, refining processes, marketing and distribution, and taxes. While the author provides valuable insights, one crucial aspect is notably absent: profit margins. To shed light on this, we can reference a piece by Hal Singer published in Washington Monthly on March 10, which emphasizes profit dynamics during market fluctuations.
No speculation is needed. The empirical data from the last energy crisis speaks volumes.
When Russia invaded Ukraine in February 2022, crude oil prices increased by approximately 71 cents per gallon. However, retail gas prices surged by roughly $1.50 per gallon, creating a remarkable 79-cent margin that amounted to pure profit for refiners and gas stations, all happening amidst the context of war.
According to a report by California’s Division of Petroleum Market Oversight (DPMO) in October 2025, every documented price spike—whether in 2019, 2022, or 2023—was likewise accompanied by a spike in profits. Retail prices consistently escalated beyond what the rise in crude oil costs could justify. Interestingly, even as wholesale prices eventually declined, gas stations maintained elevated prices, leading to increased windfall earnings.
Moreover,
the profitability of refiners is quantified by what’s known as the crack spread. This measures the difference between the cost of crude oil and the prices at which refined products like gasoline and diesel are sold. A commonly used metric, the “3-2-1 spread,” assumes that three barrels of crude yield two barrels of gasoline and one of diesel.
This spread rocketed from $28.55 on February 27 to $44.33 on March 5. While it hasn’t yet approached the peak of $60 observed during the Russia-Ukraine conflict in May 2022, this increase still represents a significant profit opportunity. Refiners are charging gas stations a premium that far exceeds their cost increases.
For instance, Exxon recently reported a net income of $4.2 billion, while Chevron declared a profit of $2.2 billion, both surpassing Wall Street’s expectations for the first quarter. These figures might have been even higher without losses incurred from financial derivatives tied to oil prices that spiked before delivery. The forecast for the remainder of the year looks promising. According to CNN Business:
Analysts anticipate that profits for both companies will skyrocket for the rest of the year. Prior to the companies’ earnings reports released on Friday, experts predicted that ExxonMobil’s second-quarter earnings would more than double compared to last year and projected a 46% increase in full-year earnings. Chevron’s profits are expected to more than triple in the current quarter and rise by 56% for the year.
This would mark their most profitable year since 2022, when the war in Ukraine caused average gas prices in the U.S. to hit a record $5.02 per gallon.
Now for the official narrative.
By Robert I. Harris, Assistant Professor of Economics, Georgia Institute of Technology. Originally published in The Conversation.
The U.S. Energy Information Administration forecasts that the national average retail gasoline price will reach around $4.30 per gallon in April 2026, marking the highest monthly average of the year. The political response has been predictable: Georgia has suspended its state gas tax, while other states consider similar tax holidays. Additionally, the White House has introduced a temporary waiver of the Jones Act to facilitate the movement of more domestic fuel to East Coast ports.
As an energy economist, I frequently receive inquiries about what determines gas prices and how various policies can impact them.
The price of a gallon of gas at retail consists of four primary components: the cost of crude oil, refining, distribution and marketing, and taxes.
As of January 2026, crude oil represented approximately 51% of the pump price, followed by refining at about 20%, distribution and marketing around 11%, and taxes at roughly 18%. This composition can vary significantly: when crude oil prices spike, they can account for over 60% of the price; conversely, when prices decline, taxes and logistics make up a larger proportion of the total cost.
Crude Oil: The Primary Ingredient
Given that crude oil prices represent the largest factor, fluctuations in the global oil market most heavily influence what consumers pay at the pump.
Typically, substantial shifts in crude prices result from changes in global demand and expectations, rather than from supply disruptions, as highlighted by renowned economist Lutz Kilian in his widely cited 2009 research.
However, the current situation in early 2026 concerning the war in Iran represents a notable exception: a classic supply shock. Significant disruptions to shipping routes in the Strait of Hormuz and assaults on Middle Eastern oil infrastructure have removed millions of barrels per day from the global market.
Most drivers cannot rapidly adjust their driving habits or fuel consumption when prices rise, resulting in relatively inelastic gasoline demand. Hence, an increase in crude prices typically leads to higher consumer costs rather than decreased driving.
Refining, Regulations, and the California Dilemma
The refining process transforms crude oil into gasoline on an industrial scale. The U.S. does not operate as a singular gasoline market; approximately 25% of U.S. gasoline is a cleaner-burning blend, known as “reformulated gasoline,” mandated in urban areas across 17 states and the District of Columbia to mitigate smog.
California employs an even stricter formulation that few out-of-state refineries produce. Adding to the complexity, California is isolated geographically, with no pipelines transporting gasoline from other U.S. refining regions.
Consequently, gasoline prices in California consistently surpass the national average. This discrepancy can be partially attributed to higher state taxes and stringent environmental regulations. However, a 2015 refinery fire in Torrance also curtailed production capacity, driving prices further up—around 20 to 30 cents per gallon higher than anticipated from these factors.
Energy economist Severin Borenstein of the University of California, Berkeley, has dubbed this phenomenon the “mystery gasoline surcharge.” He attributes it to a lack of competition among refiners and gas stations in California compared to other states. The state’s Division of Petroleum Market Oversight estimates that this surcharge cost California drivers approximately $59 billion from 2015 to 2024. While it remains unclear who reaps this financial benefit, it could be gas stations or refiners, who have complex contracts at play.
Fuel Transportation to Your Car
The distribution and marketing sector encompasses all expenses involved in transporting gasoline from refineries to fuel pumps.
Gasoline is conveyed via pipeline, ship, rail, and truck to wholesale points, after which it reaches service stations through local delivery trucks.
At the retail level, major cost factors include station rent and labor, the price for bulk gasoline acquisition, credit card transaction fees (which can range between 6 to 10 cents per gallon), and franchise fees paid to national brands like Sunoco or ExxonMobil to identify their stations.
The majority of gas station operators earn only a few cents per gallon from fuel sales; hence, many gas stations double as convenience stores with additional services. Borenstein and his colleagues have documented how retail prices spike
Examining Gas Tax Holidays
The federal government imposes taxes on fuel, at rates of 18.4 cents per gallon for gasoline and 24.3 cents per gallon for diesel. States add their own taxes, which can vary widely, from 70.9 cents per gallon in California to a mere 8.95 cents in Alaska.
When gas prices spike, many politicians debate temporary suspensions of their state’s gas taxes. While this reduces prices, the effect may not align with public expectations. Research indicates that consumers see only about 79% of the tax reduction, meaning oil companies and retailers retain roughly one-fifth for themselves instead of fully passing on the savings to consumers.
Moreover, gas tax holidays diminish the funding allocated for essential infrastructure maintenance, such as roads and bridges. This places the burden of upkeep onto future drivers and general taxpayers.
Additionally, fuel taxes are designed to make drivers accountable for some of the social costs resulting from their driving, including carbon emissions, local pollution, congestion, and accidents. However, Borenstein finds that existing U.S. fuel tax levels are already far below societal costs. Therefore, reducing gasoline taxes effectively increases the cost burden on everyone else.
Understanding the Jones Act’s Impact
The Jones Act of 1920 mandates that cargo transported between U.S. ports must be carried on vessels built and registered in the U.S., owned by American citizens, and crewed primarily by U.S. citizens and permanent residents. Of the world’s 7,500 oil tankers, just 54 meet these stringent requirements, and only 43 are capable of transporting refined fuels such as gasoline.
Due to the elevated refining capacity on the Gulf Coast, some U.S. gasoline is exported abroad while the Northeast imports fuel, largely due to the high costs associated with transporting fuel between U.S. ports.
Economists Ryan Kellogg and Rich Sweeney estimate that this law adds approximately a penny and a half per gallon on average to East Coast gasoline prices, costing drivers around $770 million annually. Given the war’s influence on gas prices, the Trump administration has temporarily suspended these requirements, a measure usually enacted during events such as hurricanes affecting Gulf Coast refineries and pipelines.
What Influences the Price?
As a result of all these variables, what drivers observe at the pump is primarily determined by global crude prices, alongside various domestic costs, though not all of these are inefficient.
Temporary gas tax holidays provide only a partial and fleeting rebate. Waivers of the Jones Act save mere cents, while a permanent repeal may lead to broader changes, such as reduced transportation costs across all goods, potentially lowering emissions and infrastructure damage associated with freight movement. Unifying fuel standards across states and seasons could lower prices slightly, though it may result in increased emissions.
Ultimately, the most reliable defense against oil price shocks is having a more fuel-efficient vehicle or one that operates without gasoline altogether. For now, my aim as an economist is to clarify what that $4.30 truly covers.
