Breakdown of gas prices | Supply, demand, and market equilibrium | Microeconomics | Khan Academy | Summary and Q&A

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March 13, 2012
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Breakdown of gas prices | Supply, demand, and market equilibrium | Microeconomics | Khan Academy

TL;DR

Oil and gas prices are correlated, with fluctuations in oil prices influencing gas prices. Refineries play a crucial role in breaking down crude oil into gasoline and other products.

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Questions & Answers

Q: How do oil and gas prices correlate?

Oil and gas prices have a strong relationship, where increases in oil prices tend to lead to higher gas prices. However, the correlation is not always proportional, with gas prices being less volatile than oil prices.

Q: How does crude oil turn into gasoline?

Crude oil is extracted from oil rigs, either offshore or on land. It is then transported to refineries, where it undergoes a process of distillation to separate different components. Gasoline is one of the products obtained from this process.

Q: What is the crack spread?

The crack spread refers to the difference between the amount a refinery receives for its refined products and the cost of crude oil. It is a measure of the profit margin for the refinery.

Q: How are gas prices affected by taxes?

Gasoline is heavily taxed, varying across different jurisdictions. Taxes can significantly impact the final price paid at the pump, with a portion going to state and federal governments.

Summary & Key Takeaways

  • Oil and gas prices are strongly correlated, with oil prices being more volatile than gas prices.

  • Oil rigs, both offshore and land-based, extract oil from the ground, which is then transported to refineries.

  • Refineries break down crude oil into gasoline and other products, with gasoline comprising a significant portion of their revenue.

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