Why Do Gasoline Prices Differ Across U.S. States?

Gasoline prices differ substantially across different parts of the United States. For example, the average price in Illinois is currently 70 cents/gallon higher than that in Wyoming, and California motorists pay 86 cents/gallon more than the folks in Wyoming. Why is that?

Source: GasBuddy.com

The biggest single factor is taxes. The tax on a gallon of gasoline in Illinois is 25 cents higher than in Wyoming, while the California tax is 35 cents higher.

Source: American Petroleum Institute

But that still leaves 45 cents of the Illinois premium and 51 cents of the California premium unexplained. Political Calculations has created a map of average gasoline prices once you subtract out taxes. (His original map, like that from GasBuddy above, also has a nice mouse-over feature if you want to see more details).

Average cost of gasoline after subtracting taxes. Source: Political Calculations

Another minor factor in the price differential is differences in the gasoline itself. Motorists in California, for example, are required to use a higher-quality fuel in order to help limit air pollution.

Source: ExxonMobil

A more important factor is differences in the cost of crude oil available to refineries in different parts of the country. For example, sweet crude in Louisiana is currently fetching $125 a barrel, or $27 more than its counterpart in Wyoming. If the refined product market in Wyoming were completely separate from that in the rest of the country, we might then expect gasoline in Wyoming to be 68 cents/gallon cheaper than on the coasts as a result of differences in the cost of crude alone.

But the refined markets are not completely separated, and no producer would want to sell gasoline in Wyoming if you had an easy way to get it to somebody willing to pay 68 more cents per gallon for it. Although America’s pipeline system for transporting crude oil is not up to the task of moving all the crude available in Wyoming to refineries in Louisiana, the infrastructure for transporting refined products is somewhat better. The result is that Americans in the middle of the country pay more and those on the coasts pay less than they would if the product markets were completely isolated geographically. The equilibrium price differential is the one that equalizes the return from selling in different markets after taking into account transportation costs.

Major U.S. oil, gas, and product pipelines. Source: World Factbook.

In fact, refiners in the central U.S. have such a competitive advantage through their access to cheap locally produced crude that they have turned the U.S. into a net exporter of refined products like gasoline, despite the fact that we of course are still a huge net importer of the crude petroleum itself. We use pipelines to ship gasoline and diesel to the Gulf of Mexico, and tankers from there to sell refined products around the globe. The flip side of this is that refiners on the East Coast find themselves at a huge disadvantage. Refineries accounting for half of East Coast capacity are set to close.

That means that if you live in New York and complain about paying more than drivers in the central United States, you could soon see that differential increase even more.

Why do gasoline prices differ across U.S. states?

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About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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