Why Are Gas Prices So Different in Different Places?

Taxes, infrastructure, and regulations affect gas prices from state to state

Man Purchasing Gas
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Grace Cary/Getty Images

So California drivers are shelling out $5.84 per gallon, while Oklahomans pay a measly (relatively speaking) $3.69. How does that work?

Well, it’s complicated. The price of gas is based on a number of things, some of which vary according to where you live. Most people know that the price of crude oil affects how expensive gasoline is. That doesn’t fluctuate by state, but taxes, fees, and environmental regulations do. Location matters, too. Is your state near a refinery, for example, or does gasoline have to be transported long distances to get to your local gas station?

Key Takeaways

  • The difference in gas prices among states can be more than $2 per gallon.
  • State taxes and fees are a major reason for the variations.
  • Proximity to refineries and transportation facilities can also influence how much you pay at the pump, and so can environmental regulations like those in California that require cleaner-burning fuel.

With high prices for gas hitting drivers in the wallet—the national average for a gallon of regular unleaded has gone from $3.29 to $4.18 since the beginning of the year—understanding what goes into the price of gas and why it can vary by as much as two dollars per gallon can help you make sense of it all.  

“It is important to keep track of the differential between states, because that is a way to see if it is in line with the differential in taxes and fees or if there is some other factor raising prices,” said Severin Borenstein, faculty director of the Energy Institute at Haas at the University of California, Berkeley, in an email.

Some states are trying to give consumers a break from the high prices by easing up on taxes. Connecticut joined Georgia and Maryland last week in temporarily suspending their gas taxes, and at least 16 other states are considering similar measures. 

Here’s What Goes Into the Price of Gas

The biggest thing that determines the price of gas is oil, since gasoline is made from oil. The price of oil accounted for 53.6% of the price of a gallon of regular in 2021, according to the Energy Information Administration. Oil prices were already high this year—because of an imbalance between global supply and demand—when the war broke out between Russia and Ukraine. Because Russia is one of the world’s largest producers of oil, the conflict complicated supply issues and drove the price of oil higher. 

Next up are federal and state taxes, which accounted for 16.4% of the cost of a gallon of gas in 2021, the EIA said. Distribution and marketing made up 15.6% of the price of a gallon, and refining costs and profits made up 14.4%. 

Taxes and Fees

One of the biggest factors in the differences among states in the price of gas is taxes and fees. Gasoline taxes are mainly used to fund road repairs and infrastructure upgrades. States may also charge a variety of other fees, including environmental, storage, and cleanup fees, which can drive up the price of gas even more.

Gasoline is subject to excise taxes, which are imposed on goods and services at the manufacturing level, not at the sales level, so they become part of the product’s price. Federal excise taxes on gas were 18.3 cents per gallon as of January, according to the American Petroleum Institute. But most states have their own excise tax as well. They range from the 4 cents per gallon Florida drivers pay to 49.4 cents per gallon in Washington state and 51.1 cents in California.

Most of the additional fees amount to a few cents per gallon, and they’re often allocated for a specific use, like the 2-cent tank inspection fee in South Dakota. Cleanup fees for environmental maintenance are common, including 1.5 cents per gallon paid by drivers in New Hampshire for underground storage tank cleanup and one penny per gallon for Wyoming’s environmental cleanup fund. There’s even a half-cent per gallon petroleum testing fee in New York. 

Total state excise taxes and fees range from a low of 15.13 cents per gallon in Alaska to a high of  68.15 cents per gallon in California. 

A handful of states also apply their regular sales tax at the pump when you make your purchase, adding even more to the cost of filling your tank.

Not all gas taxes are assessed by the state, however. County governments and regional entities can also add taxes. For example, drivers in the Mississippi counties of Hancock, Harrison, and Jackson pay a 3-cent per gallon seawall tax, which helps maintain the seawall along the beaches there.

Location

State and local taxes aren’t the only thing creating gas price differences among states. Like all products, gasoline must be transported from where it’s made to where it’s used, and that costs money. Transportation costs are lower for gasoline stations that are closer to a seaport, pipeline, or refinery where oil is turned into gas than in locations where gas has to be shipped from far away.

California is a good example. Because of its geography and infrastructure, California has been referred to as a “gasoline island,” cut off from gas pipelines to the east because of mountains and dependent on the Panama Canal for oil imports. Most of California’s gas is made at refineries in-state, but it has no pipeline between northern and southern California, so even transporting gas within the state is difficult. 

“It makes California more balkanized and more prone to disruptions,” said Berkeley’s Borenstein. “If there is a price spike, the state can’t easily access supply from other parts of the country.” 

Local and regional competition can also come into play, with gas stations that are in better locations charging higher prices. Even stations that are close together may charge markedly different prices because of different traffic patterns, access to suppliers, and rents, according to the EIA. 

Natural disasters can take a toll as well. A hurricane, fire, or earthquake can take refineries and infrastructure offline long enough to make prices shoot up in some areas, but not others.

Some parts of the country have programs in place to protect the environment as well, and that means more costs. In California, special additives must be used in gasoline to make it burn cleaner. The cleaner gas has been effective in reducing smog around Los Angeles, but it’s more expensive to make. Borenstein estimated that California’s special gas adds 10 cents per gallon. 

Have a question, comment, or story to share? You can reach Terry at tlane@thebalance.com.

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