Retail gasoline prices are among the most recognizable price point in American commerce, yet they are among the least understood. What goes into the price of a gallon of gasoline? Here is a primer on what causes prices to go up or down and vary from store to store.

Ownership & Supply Arrangements

Two key factors that influence retail motor fuels prices are who owns the store and how they get their supplies.

Unlike a few decades ago, when the major oil companies owned and operated a significant percentage of the fueling locations, today only about one percent of all stores are owned by one of the major oil companies.

About another 4 percent are owned by a refining company like Valero, Sunoco or Hess. Instead, the vast majority about 95 percent of stores are owned by independent convenience store companies, whether one-store operators or large regional chains.

Each business has a number of factors that could impact its sales price. They include:

- Branded or unbranded fuels: Typically, stores that sell a branded fuel pay a premium for that fuel, which covers marketing support and signage, as well as the proprietary additive package.

- Dealer tank wagon or rack: Retailers who purchase fuel via dealer tank wagon may pay a higher price than those who get their fuel at "the rack" or terminal. However, rack prices may experience more volatility.

- Length of contract: Even if they sell unbranded fuels, retailers may have long-term contracts with a specific refiner. The length of the contract which can be 20 years, sometimes longer can affect the price that retailers pay for fuels.

- Volume: As in virtually every other business, retailers may get a better deal based on the amount of fuel that they purchase, whether based on volume per store or total number of stores.

Even within a specific company, stores may not each have the same arrangements, since companies often sell multiple brands of fuels, especially if they have acquired sites with existing supply contracts.

Crude Oil Prices Have Most Affect on Retail Prices

There are four factors that make up the price of retail fuels: Crude oil costs, taxes, refining costs and distribution and marketing (which accounts for all costs after the fuel leaves the refinery).

Crude oil prices have, by far, the biggest affect over the retail price of fuels. For one, crude oil costs are responsible for about two-thirds of the cost of a gallon of gasoline. In 2010, crude oil costs were 68 percent of the retail price of gasoline. Second, while there may be slight variations in the costs of refining or distributing and retailing fuels, crude oil prices can experience huge swings. (Taxes are largely static, unless they are based on prices not set per gallon. Refining and marketing margins have a much less significant impact on prices, and are often a function of wholesale prices.)

Give there are 42 gallons in a barrel, a rough calculation is that retail prices ultimately move approximately 2.5 cents for every $1 change in the price of crude oil. In short, as crude prices change, so does the price of retail gasoline.

Costs of Goods Sold Leads Retail

Retail prices are set according to a complex analysis of competitive pressures and the ever-changing wholesale cost of gasoline. Due to differences in supply arrangements, contract terms and delivery schedules, retailers often pay different prices at different times for the gasoline they sell at retail.  Retailers must set a price that best balances their need to cover their costs with the need to remain competitive and attract consumers, who are very price sensitive and will shop somewhere else for a difference of a few cents per gallon.

Consequently, retailers often cannot always adjust retail prices to fully compensate for changes in their wholesale costs because they must remain competitive with nearby stores who may not have incurred similar changes in costs.

When prices go up, retailers may reduce their markup to remain competitive with nearby stores. Likewise, when prices go down, retailers may be able to extend their markup and recover lost profits.

In the end, the annual average retail markup (the difference between retail price and wholesale cost) has averaged 15 cents per gallon over the past five years.

Retail Profitability Measured Over Time

The pattern of retail profitability is the opposite of what most consumers think. Due to the volatility in the wholesale price of gasoline and the competitive structure of the market, fuel retailers typically see profitability decrease as prices rise, and increase when prices fall. On average, it costs a retailer about 12 cents to sell a gallon of gasoline. Using the five-year average markup of 15 cents, the typical retailers averages about 3 cents per gallon in profit. In 2010, the average national retail markup was 16.3 cents, delivering an average profitability of four to five cents per gallon.

Over the course of a year, retail profits (or even losses) on fuels can vary widely. In some cases, a few great weeks can make up for an otherwise dreadful year or vice versa.

With its extreme volatility, fuels retailing is not for the faint of heart or those with limited access to capital. Perhaps that is why that since 1994, while overall fuels demand in the United States has increased, the overall number of fueling locations has decreased from 200,000 to less than 160,000 sites.

The retail price of gasoline is affected by a variety of factors, including the supply and price of crude oil, refinery operations, transportation, retail overhead and taxes. The worldwide price of crude oil, which is the raw material for making gasoline, is determined by supply and demand and is often affected by world events. Crude prices are affected by a large number of factors including growth in world demand, OPEC actions, political uncertainties, etc. Timing and availability of imports from outside the U.S. can affect the supply/demand balance as well as unforeseen operating problems within the refining and distribution system, particularly during periods of major refinery maintenance. A $1 per barrel increase in crude generally translates to a two to three cent per gallon increase in the price of gasoline. (The price of crude affects all states fairly evenly.)

The second major contributor to the price of gasoline is the amount of tax that is paid. In West Virginia our state tax is now 33.4 cents per gallon. Furthermore, federal tax is an additional 18.4 cents per gallon. In West Virginia every time you fill up you pay 50.6 cents tax on every gallon. That is a lot of tax! In WV we pay 1.7 cents per gallon more in tax on each gallon of gas than the national average.

West Virginia has only one very small refinery in the state, located in Newell, WV. It is operated by Ergon and has a limited capacity. Again, with the exception of one state, Maryland, our surrounding states have a huge advantage over us.

West Virginia has approximately 1450 retail locations that sell gasoline. The average station sells approximately 48,517 gallons per month. Typically, when a station sells fewer gallons they charge more for it to allow them to cover the fixed costs (payroll, facilities, and insurance) for their business. Stations with large volumes can often sell their products for less.

Due to our limited distribution system — no pipelines and limited terminals, our state has less inventory than others. Much of our fuel comes from out of state. Bringing fuel from out of state increases trucking costs.

Credit card fees are the convenience and petroleum retailing industry's top pain point.  In 2008, credit card fees surged another 10.5 percent to reach a record $8.4 billion - nearly three times the level just five years ago and an amount more than $3 billion greater than convenience store industry pretax profits.  We are urging Congress to persuade the credit card companies to explain their fees, practices and policies to retailers and the public.  The National Association of Convenience Stores (NACS), of which OMEGA is a member, is the named plaintiff in a class action suing not only Visa and Mastercard, but also their issuing banks.

Higher taxes already drive West Virginians to border states to shop; a bottle deposit would create an even greater incentive for many residents that live near state borders. Stores in border counties of deposit states experience a 4.6% loss of sales to non-deposit border states, which affects not only businesses but also local and state tax revenues. A bottle deposit would add $1.20 on a 12- pack of soft drinks — a cost that could be avoided by purchasing the same product in any neighboring state. Consumers could then collect $1.20 in refund by returning the containers to West Virginia recycle centers.

Administrative Burden

Retailers would be required to collect, keep track of and remit the taxes.

Bottle Deposit Facts

■ Forced Deposits Do Little to Help the Environment.

As stand-alone efforts, forced deposit programs provide surprisingly little benefit for litter control or recycling. Even the most comprehensive bottle deposit targeting all beverage containers only addresses 8.5% of roadside litter and 4% of municipal solid waste generated. Besides, the return rates achieved by deposit programs are dropping rapidly, especially in states where comprehensive recycling alternatives are widely accessible.

■ Forced deposits impose a hidden, regressive tax on consumers.

First, consumers pay higher prices to cover increased costs for beverage manufacturers, distributors, and retailers to operate the container redemption system and for handling fees mandated in several forced deposit states. Second, consumers lose their deposits if they do not take their containers back to designated redemption sites — even though they may still recycle the containers by other means. Unfortunately, the higher costs are borne dis- proportionately by those least able to pay — low-income families and seniors.

■ Forced deposits are costly to operate and administer.

Analysts on both sides of the issue agree on one thing: forced deposit programs are the most expensive way to provide litter control and recycling.

Comprehensive recycling programs are better investments. Comprehensive litter control outperforms forced deposits.

The West Virginia Oil Marketers & Grocers Association is mangaged by a dedicated board of directors.

Day-to-day operations of OMEGA are conducted by the organization's president. The role of the president is to assist members in increasing their business effectiveness and profitablilty by providing resources for education, training and ideas exchanged; encouraging a high level of business ethics and a postive image for the industry; encouraging governmental action beneficial to the industries through active participation of its membership; and, providing cost effective services for the membership.

OMEGA members do a great job managing their businesses. However, as with all major industries, OMEGA members receive oversight by many city, county, state and federal regulatory agencies.  In addition to policing ourselves, listed below are just some of the state agencies which oversee and regulate member operations:

Federal and state taxes account for one-fifth, or approximately 15 percent, of the cost of a gallon of gasoline in West Virginia.

OMEGA members are local entrepreneurs employing thousands of West Virginians.  Profits from OMEGA businesses stay in the community and strengthen the state economy. 

Selling restricted products - tobacco, alcohol and lottery - to individuals under age is illegal in West Virginia. State and federal law prohibits selling tobacco and lottery products to anyone under age 18.  An individual must be 21 to purchase alcohol.