It's a vital product. Consumers are understandably sensitive to gasoline prices. And, with price signs in many parts of the world on every main street, every small change is instantly visible. People wonder why gasoline prices fluctuate so much, why prices vary from place to place, and why prices are not lower.

Gasoline Prices over the Years
During the First World War, gasoline sold for about $0.25 per gallon in the U.S. If that price had increased at the same rate as inflation (the change in the prices of other goods and services), gasoline in 2001 would cost nearly $3.00 per gallon. The price of gasoline has averaged about $2.00 per gallon in inflation-adjusted dollars over the last 80 years.

Taxes account for a large portion of the retail gasoline price in many countries.

The Cost of Gasoline
Over the long term, gasoline prices reflect crude oil prices, taxes and the cost of refining and distribution, including measures for environmental protection and a reasonable return for investors. Let's look at each component.

Crude Oil. Crude oil prices have varied widely over time through long years of growing demand, new technologies, intense competition, and the changing political landscape. Over just a three-year period from 1998 to 2001, the benchmark Brent crude price ranged from a low of $9 per barrel to a high of $37. This variation alone would account for a swing of about $0.65 per gallon in gasoline prices.

Refining and Transportation Costs. Today's gasoline market is not the same one your parents and grandparents knew. It's now a complex system requiring globally interconnected facilities and logistics to meet specific local fuel needs and regulations. With all these complexities, you might think industry costs must have grown significantly over the years. In fact, the opposite is true. In inflation-adjusted dollars and excluding crude oil and taxes, the industry cost of refining and transporting gasoline in the United States — including profits — has declined.

Although costs differ from country to country, the trend has been the same around the world. These reductions have been driven by competition among suppliers to become more efficient through economies of scale, improved refinery technologies that increase product yields and use less energy, and efficient management - as well as by lots of investment by the industry. Until very recently, excess refining capacity and intense competition have kept refining profitability low — about the same level as U.S. Treasury Bills.

Taxes. Government taxes represent a large share of gasoline prices. In some countries in Europe, taxes are 80 percent of the total pump price. Taxes in the United States in 2000 averaged about $0.40 per gallon, split roughly 50/50 between federal and state. An American driving 15,000 miles per year would pay about $300 per year in gasoline taxes. Taxes account for most of the difference between the relatively low gasoline prices in the U.S. and high prices in Europe and many other countries, where gasoline can cost over $4.00 per gallon. The average French or Italian family, who drive small cars fewer miles each year than their American counterparts, may pay the equivalent of $2,000 per year in gasoline taxes.

Competition
The gasoline market is highly competitive. Gasoline is traded in bulk on a worldwide basis much like agricultural products. Major international oil companies, government-owned oil companies, independents, traders, resellers and individual dealers all play a role in the marketplace. The interaction of thousands of buyers and sellers around the world establishes world wholesale gasoline prices, which will vary according to location and local market conditions.

ExxonMobil has been in business for nearly 120 years. Despite our size and success, we currently supply only 15 percent of United States and worldwide gasoline demand.

Crude oil and taxes account for the largest share of gasoline costs. The cost of making and distributing gasoline has fallen dramatically over the years.

Who Sets Pump Prices?
In most countries with free markets, service station operators — who are generally independent business people — set retail pump prices. The supplier typically sells the station owner gasoline at a wholesale price reflecting prevailing market conditions. The station operator decides, in turn, what price he will charge the public.

When supply outpaces demand, service stations will lower prices to compete with each other for business. When demand outstrips supply, service stations raise prices to prevent run-outs. Higher prices encourage station owners and suppliers to seek additional supplies. In free markets, competition generally rebalances supply and demand quickly with minimal disruption to consumers.

In some countries, governments control retail or wholesale gasoline prices, and many people assume these regulations protect consumers from higher prices. More often, however, such market distortions undermine product quality, service, supply, and reliability by encouraging gasoline consumption and discouraging investment.

Why Do Gasoline Prices Fluctuate?
Although prices tend to follow cost over the long-term, competition may cause prices to vary from location to location as the number, size and structure of retail stations, as well as the number of customers, volume, fuel specifications, taxes and other factors differ. Furthermore, many factors can affect the gasoline supply/demand balance and cause temporary pressure on prices — both up and down.

Seasonality. Historically, gasoline demand varies over the course of the year. Driving patterns differ around the world, but as a general rule, retail gasoline prices tend to rise before and during the summer — when people drive more — and then decline during the winter. In the U.S., for example, good weather and vacations raise summer demand by nearly 5 percent compared to the rest of the year. Historically, prices during the summer show a 5 cent-per-gallon increase, even after correcting for changes in other costs.

Logistics. Transportation costs can vary widely with distance and cargo size. It costs less to bring crude oil to refineries near major producing areas or to supply gasoline to customers near refineries. Supplying markets with few customers and limited infrastructure may involve additional costs. As a result, remote, small markets, such as those in Africa or other developing countries, are often the most expensive to supply.

Commodity markets. Many people overlook the impact of the futures markets on prices. At places like the New York Mercantile Exchange (NYMEX), commodities traders in crude oil and gasoline futures and options significantly impact prices. In these markets, prices are set as much by the perception of future market conditions as by actual supply and demand. The prices of actual gasoline trades are usually linked to these volatile commodities' "benchmark prices".

Tight supplies. In 1983, U.S. gasoline demand was around 100 billion gallons, about the same as in 1973. But beginning in the mid-1980s, demand began to grow again by 1 to 2 percent each year. By last year Americans used 130 billion gallons, 30 percent more than in 1983.

For many years, the U.S. had extra refining capacity. Today, however, this is no longer true. Although the oil industry has invested billions of dollars to expand refinery capacity, continued expansion and upgrading are becoming more difficult in the face of high costs, local opposition and complex regulations. And the newest grassroots refinery in the U.S. was built more than 20 years ago. With capacity tight, refineries now run as hard as they can and produce as much fuel as they can, consistent with safety and good maintenance. So when there is an unexpected refinery problem or transportation bottleneck, supplies can suddenly become limited.

"Boutique fuels" compound the problem. Loss of supply in one area needs to be made up not just with more gasoline from another source, but with precisely the right kind of gasoline. Rapid, but temporary price increases may occur as gasoline marketers bid up prices to compete for scarce alternative supplies.

Just as often, oversupply imbalances may drive pump prices down.

Long-Term Reliability
Consumers' interests are best served by a free and open market supported by energy policies that encourage adequate capacity at every point in the supply chain: crude oil production, refining and transportation. Over time, prices will both rise and fall in response to what happens in the market. ExxonMobil is in business for the long term, and our success depends on meeting the gasoline needs of our customers and providing quality products and services at competitive prices.

It takes a lot to get gasoline into your tank.

From crude oil found miles below the surface with supercomputers and satellites, gasoline is manufactured and blended to precise specifications in modern refineries and moved through a complex global network of tankers, pipelines, tank trucks and terminals to service stations, all working around the clock to make sure gasoline is where you want it, when you want it. And no reservation is required.

We think it's pretty amazing. As you'd imagine, we're proud of our people, our accomplishments and our success in meeting our customers' needs in a competitive market.

Gasoline. Mobility. Reliability. Freedom.