The cost of producing hydrocarbons are among the most cost components to the price that you pay for natural gas delivered to your home and the price that you pay at the pump for the gasoline and diesel you fill your car with. The other cost components that go into the prices that you pay vary in both number and amount from one fuel type to the next, and depend on what type of customer you are. Energy consumers are divided into five sectors. These are the residential, commercial, and industrial sectors, as well as the transportation and electric sectors. In the US, all of these sectors, except transportation, are significant consumers of natural gas. The residential and commercial sectors primarily use natural gas for space heating, while the industrial sector uses it for both industrial heating processes such as cooking and as a feed stock in producing chemicals such as fertilizer. The electricity sector burns natural gas to generate electricity in natural gas power plants. The primary cost components for natural gas in the US are the production costs and the cost to transport the gas to customers, with the relative importance of these two costs varying, depending on the consuming sector. For example, the electric sector is one of the largest consumers of natural gas in the US. Power plants receive natural gas supplies directly from natural gas transmission lines so little to no distribution is involved. This is in contrast with residential customers, who individually consume less natural gas than power plants. And as a sector, consume less gas overall than the electric sector. However, residential customers are the largest number of customers for natural gas in the U.S., and so require extensive distribution services. This in turn leads to a marked difference in how much and for what residential customers pay for natural gas versus operators of natural gas power plants. Greater than 80% to the price paid by the electric sector goes towards the production cost of natural gas, and less than 20% goes towards transmission of that gas to the plants. In contrast, production costs represent only 40% of the price paid by residential customers, with the rest going towards transmission and distribution. And of these 46% of the price that residential customers pay is for distribution. As a result of this extra distribution cost, residential customers pay on average almost double what power plant operator’s pay for natural gas. Note that these percentages are for domestically produced and transported natural gas. If the bulk of natural gas consumed in the US had to be shipped into the country as liquified natural gas or LNG, then the transportation component of natural gas prices would be even higher. Now let's turn to the cost components that go into the price you pay for gasoline or diesel that you put into your car. These cost components are of particular importance because the transportation sector is almost completely reliant on petroleum products. And the prices of gasoline and diesel drive the price of all other petroleum products, as well as the price of crude oil. Crude oil in fact is the biggest cost component for gasoline and diesel, representing 50% to 70% of the price at the pump between years 2000 and 2010. The other cost components are refining, distribution, marketing, and taxes. These respectively account for 7 to 15%, 10 to 12%, and 15 to 22% of the price paid at the pump between 2000 and 2010. The retail component of the price is the smallest, averaging less than or equal to 5%. In other words, gas station owners typically make about $0.10 on every gallon they sell. The bulk of their profits actually come from food, drink and other store items customers buy at the station while fueling up their cars. The tax component to the cost of gasoline and diesel varies from state to state. For example, North Carolina, where Duke is, has among the highest gasoline and diesel taxes, while neighboring Virginia and South Carolina have among the lowest fuel taxes. Revenues from the fuel taxes primarily go to road construction and maintenance, funding for which takes a hit, when demand for fuels falls or the automotive fleet becomes more efficient and uses less gas or diesel to travel the same distance. The most watched component to gasoline and diesel prices after the cost of crude oil is the cost of refining. The difference between the spot price for a barrel of crude and the spot price for 42 gallons or a barrel of gasoline is an example of a Simple Crack Spread. But since a barrel of crude cannot be turned into a barrel of gasoline more accurate measure refining margins is known as the three, two, one crack spread. This spread is based on the approximation that it takes three barrels of oil to produce two barrels of gasoline and one barrel of diesel. Thus, the three, two, one crack spread, is the difference between the price of the barrel of oil, and one third the summed price of two barrels of gasoline plus one barrel of diesel. Examination of this spread, shows that refining margins are generally slim. However, the margins are often out of phase with the price of crude oil. And could be quite high when the price of crude is low. This, then, is why integrated oil companies are in the refining business as well as the exploration and production business. It helps stabilize their profits for when the price of crude oil is high and integrated oil and gas companies exploration and production unit makes money. And when the price of crude is low, the company's refining unit typically makes money. Finally, one other point. Changes in the prices of crude oil typically don't show up in the price of gasoline or diesel until a few weeks later. This is a reflection of how long it takes to move the petroleum products from refineries to retail distributors, as well as a reflection of crude oil and petroleum product storage at refineries and distribution centers. The greater these storage's, the longer the lag between price changes in crude oil versus price changes in gasoline and diesel.
