Eng-101 Final

Today’s Gasoline Prices

Right now the gasoline prices have gotten everybody’s attention. As the price of gasoline continues to rise at the pump, I find myself asking, “What drives the price paid by everyday customers at the pump for a gallon of gasoline?” So I decided to find out how the prices are set from the drilling of the oil to the price set at the pump. I will look at the price of crude oil, the profits and refining costs of refiners, the distribution costs and profits, and finally the taxes that are placed on gasoline by the federal and state governments.

The first thing that I looked at was the main ingredient of gasoline, crude oil. The price of crude oil is set by two factors, the cost of drilling the well for oil, and the price set on the commodities market on the New York Mercantile Exchange (NYMEX).

The cost of drilling for oil can be extremely expensive. The Arizona Geological Survey states that drilling in Arizona costs between 400,000 and 1,000,000 dollars, depending on where the well is and how deep you have to drill. Most oil rigs can cost anywhere from 8,000 to 15,000 dollars per day. The cost of the drilling is expensive for a number of reasons. First there is the cost of the geologists, contractors, engineers, and other people that look for the oil. Second you have to pay for the operators and equipment to drill the well. And third, the oil companies have to pay for permits, and pay taxes to drill on the land. Once the well is in place and running, the oil companies have to pay for 24 hour maintenance and upkeep since it runs around the clock. Once the oil is drilled, it is put into barrels and shipped to be sold on the NYMEX.

The price of a barrel of oil on the NYMEX is about 60 percent of the price of oil according to US Energy Information Administration (EIA). On the NYMEX crude oil is traded by what is called “futures” in a commodities market. Commodities markets can be extremely volatile especially when it comes...