If you've ever wondered why the price on the pump changes from week to week, or why your cousin in Texas pays a dollar less per gallon than you do in California, the short answer is that gas prices are built from four stacked costs: crude oil, refining, distribution and marketing, and taxes. Each of these moves independently, and the mix is different in every state. Our gas prices page has today's AAA national average and the current breakdown by state.
Here's how the chain actually works, in the order the cost builds up.
1. Crude Oil — Usually the Biggest Single Cost
On a typical day, the raw crude oil in a gallon of gasoline accounts for about 50-60% of the pump price. When crude is cheap, it can drop as low as 40%; when crude spikes — as it did during the recent Hormuz volatility — it can exceed 65%. A barrel of oil is 42 gallons, so if WTI crude is trading at $84 per barrel, the raw input cost is about $2.00 per gallon before anyone has done anything to it. See our companion piece on how oil prices are quoted per barrel.
This is why pump prices follow crude prices with a lag. Refiners buy crude on contracts that lock in delivery two to six weeks ahead. When WTI drops sharply, it takes roughly two to three weeks for the cheaper input to work through the refining system and show up at retail. The same lag operates in reverse when crude spikes.
2. Refining — The Step That Converts Oil Into Gasoline
Refineries take crude oil and fractionally distill it into gasoline, diesel, jet fuel, heating oil, and petrochemical feedstocks. The margin refineries earn — the difference between what they pay for crude and what they sell the finished product for — is called the crack spread. It usually accounts for 10-20% of the pump price.
Crack spreads widen when refining capacity is tight, which happens in two main situations: planned maintenance seasons (spring and fall), and unplanned outages from storm damage, fires, or mechanical failures. Gulf Coast refineries in particular set the tone for U.S. gasoline pricing, and we track that closely in our coverage of Gulf Coast refinery margins.
The other refining variable is fuel specification. The U.S. does not have a single national gasoline formula. California, the Northeast, and certain metropolitan areas require special reformulated gasoline (RFG) blends that burn cleaner but cost more to produce. California's CARB gasoline is the most expensive to refine in the country — one of the main reasons California gas prices regularly exceed $5.00 per gallon.
3. Distribution and Marketing
Once gasoline leaves the refinery, it has to get to your neighborhood. Pipelines carry it most of the way, then tanker trucks deliver it to stations. Terminal storage, pipeline tariffs, truck transport, station rent, credit card fees, and retail margin together account for roughly 10-15% of the pump price.
Retail margins are thinner than people assume. Gas stations typically make 5-15 cents per gallon on fuel — most of their profit comes from the convenience store attached to the pumps. That's why gas stations are almost always paired with a c-store now; pure fuel retailing is barely profitable on its own.
4. Taxes
Every gallon of gasoline sold in the U.S. pays the federal fuel tax of 18.4 cents per gallon, which has been unchanged since 1993 and funds the Highway Trust Fund. On top of that, every state adds its own tax, ranging from around 15 cents in Alaska to more than 60 cents in California and Pennsylvania. Some states also add environmental fees, underground storage tank fees, and cap-and-trade program costs.
State taxes are the single biggest driver of why the pump price you pay in Texas is different from the one your cousin pays in California. The crude oil cost is the same; the refining cost is similar; the distribution cost is close. But the tax stack can differ by 45 cents or more per gallon between states.
Why Prices Vary by State
Combining everything above, four factors explain virtually all state-to-state variation:
State tax levels (explains roughly half of interstate variation). California, Pennsylvania, Illinois, Washington, and a handful of Northeast states sit at the high end. Oklahoma, Mississippi, Texas, Louisiana, and several Mountain West states sit at the low end.
Proximity to refineries (about a quarter). Gulf Coast states with dense refining capacity — Texas, Louisiana, Alabama, Mississippi — enjoy the cheapest gasoline in the country. The West Coast, isolated from the Gulf Coast refining complex, pays a persistent premium.
Unique fuel specifications (California and a few metro areas). California's CARB gasoline adds roughly 30-50 cents per gallon over standard grade. New York City, Chicago, and several other urban areas have their own seasonal specifications.
Local competition and density (the remainder). Areas with many stations within a few miles have tighter margins; isolated highway stops can charge more.
Why Summer Gas Costs More Than Winter
Summer-grade gasoline has a lower Reid vapor pressure, meaning it evaporates less in heat — required by EPA rules from June 1 to September 15 in most of the country. Producing the summer blend adds roughly 10-15 cents per gallon. Combine that with the traditional summer driving-season demand spike, and the May-to-September period is typically 30-50 cents per gallon more expensive than December-February.
Frequently Asked Questions
If oil prices drop, why don't pump prices drop the next day?
Because the gasoline at your local station was refined from crude that was purchased two to six weeks ago. The tank truck that delivered it might have loaded at a terminal priced the day before, but refiners can't reprice stock they've already committed to. Expect pump prices to respond to crude moves over a two-to-three-week window.
Are gas stations price-gouging when crude drops?
Rarely. The bigger issue is asymmetric response: retailers often raise prices quickly on crude spikes (to protect future margin) and lower them slowly on crude drops (to recover prior margin erosion). It feels like gouging but usually reflects rational risk-management on 5-to-15-cent retail margins.
Why is gas cheaper in Texas than in California?
Three reasons, in order: California's state taxes and environmental fees add 60+ cents versus Texas's roughly 20 cents; California requires a more expensive reformulated fuel blend; and California is geographically isolated from Gulf Coast refining capacity. The California premium is structural, not a temporary gouge.
Does the price of diesel track gasoline?
Not as closely as you'd think. Diesel is a middle distillate, which also produces heating oil and jet fuel. When winter heating demand spikes or when trucking activity surges, diesel can move independently of gasoline. Diesel currently trades at a notable premium to regular gasoline.