Why Do Gasoline Prices Differ According To Region?

Although gas price levels vary over time, Energy Information Administration (EIA) data indicate that average retail gasoline prices tend to typically be higher in certain States or regions than in others (Figure 2). Aside from taxes, there are other factors that contribute to regional and even local differences in gasoline prices:

Proximity of supply - Areas farthest from the Gulf Coast (the source of nearly half of the gasoline produced in the U.S. and, thus, a major supplier to the rest of the country), tend to havehigher prices. The proximity of refineries to crude oil supplies can even be a factor, as well as shipping costs (pipeline or waterborne) from refinery to market.

Supply disruptions - Any event which slows or stops production of gasoline for a short time, such as planned or unplanned refi nery maintenance, can prompt bidding for available supplies. If the transportation system cannot support the fl ow of surplus supplies from one region to another, prices will remain comparatively high.

Competition in the local market - Competitive differences can be substantial between a locality with only one or a few gasoline suppliers versus one with a large number of competitors in close proximity. Consumers in remote locations may face a trade-off between higher local prices and the inconvenience of driving some distance to a lower- priced alternative.

Environmental programs - Some areas of the country are required to use special gasolines. Environmental programs, aimed at reducing carbon monoxide, smog, and air toxics, include the Federal and/or State-required oxygenated, reformulated, and low-volatility (evaporates more slowly) gasolines. Other environmental programs put restrictions on transportation and storage. The reformulated gasolines required in some urban areas and in California cost more to produce than conventional gasoline served elsewhere, increasing the price paid at the pump.

Twenty-five States have passed legislation to restrict the use of the gasoline additive MTBE but only California, Kentucky, Missouri, New Hampshire, New Jersey, New York, and Rhode Island relied on the additive. The Energy Policy Act of 2005, signed into law in August 2005, also allows refiners to discontinue use of oxygenates (including MTBE) in reformulated gasoline. Because of the concerns of groundwater contamination, MTBE is expected to be phased out in the U. S. in the next few years. MTBE removal requires large changes to gasoline production and distribution. California faced temporary supply dislocations and price volatility during the summer of 2003 as MTBE was removed from gasoline in the State. Nevertheless, New York and Connecticut had a relatively smooth transition phasing out MTBE in 2004 as a result of better preparation from the gasoline suppliers and distributors.

Operating costs - Even stations located adjacent to each other have different traffic patterns, rents, and sources of supply that influence retail price.