Why is gas so cheap in Missouri?

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June 9 2008 6:43 PM

Cheap Gas in Missouri

What keeps pump prices so low in certain states?

Gas prices run more than $4 in many states
Gas prices run more than $4 in many states

While the average gas price nationwide passed $4 last weekend, Missouri could boast of prices around $3.825, the cheapest in the country. How come the Show Me State has the lowest gas prices?

Taxes, pipelines, and ethanol. State gas taxes—which are assessed on top of the federal rate of 18.4 cents per gallon—tend to get the most attention in comparisons of fuel prices across states. At 17.6 cents per gallon, Missouri's gas taxes are low, but they aren't quite as low as some other states'. New Jersey, for example, takes just 14.5 cents per gallon, but its prices remain more expensive than Missouri's. (The Garden State's ban on self-service pumps adds an estimated nickel or so per gallon to the retail price.)

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In Missouri, geography helps keep prices low. The state doesn't have any oil refineries, and its share of U.S. crude oil production is so small that the Department of Energy reports it as 0 percent. But because of its proximity to Texas, Oklahoma, and the Gulf Coast states, Missouri is crisscrossed by some of the nation's larger pipelines. Oil barges also pass through the state on the Mississippi and Missouri rivers. Proximity to producers reduces transportation costs a little, but it also makes Missouri less susceptible to price spikes when individual refineries run into problems.

The distribution of gas stations within a state can also make a difference. In Missouri, many pumps are at big-box stores or stations attached to convenience stores—which take in significant income from secondary sales. At these locations, retail gas prices tend to be closer to wholesale prices. (You can find a similar effect on gas prices in Kansas, parts of Pennsylvania, and the upper Great Lakes region.)

Retail gas prices can vary depending on state and local environmental requirements. Urban areas with particularly dirty air are required by federal law to sell "reformulated gas" for all or part of the year, and because the cleaner-burning fuel is refined through a special process, it tends to be a little more expensive than regular gas. Within Missouri, for example, St. Louis and Kansas City have higher prices compared with the rest of the state because of mandates for cleaner gas. California uses a unique blend of gas due to environmental regulations and is generally cut off from supplies east of the Rockies; there, prices can spike to more than 40 cents above the national average.

Yet one piece of legislation designed to help the environment may have had the unusual effect of reducing gas prices in Missouri—at least in the short term. At the beginning of this year, the state implemented a new law requiring that all gasoline include 10 percent ethanol. With the price of crude oil rising much faster than that of ethanol, the new formulation may save consumers about 10 cents per gallon (PDF) relative to regular gas. But with ethanol production being blamed for rising food prices, Missouri lawmakers are debating rolling back the law—a change that might allow South Carolina or New Jersey to reclaim the title of the nation's cheapest gas.

Bonus Explainer: How come diesel fuel *—in Missouri and elsewhere—costs so much more than the regular stuff? Global demand. Historically, diesel has often been cheaper than regular gas. But with the rest of the world—including fast-growing China and India—so reliant on diesel, U.S. refiners have increased their exports abroad. While European refiners export gasoline to the United States, some tankers return with diesel to fulfill high demand across the Atlantic. Reduced supplies in the United States mean diesel is, on average, about 65 cents per gallon more expensive than gasoline.

While diesel and gasoline both use the same basic raw ingredient—crude oil—they require a different refining process. Given diesel's higher price, refiners almost certainly would produce more if they could, but it may take them years to build that additional capacity.

Got a question about today's news? Ask the Explainer.

Explainer thanks Severin Borenstein of the University of California Energy Institute, Hayley Chouinard of Washington State University, Michael Davis of the Missouri University of Science and Technology, Tom Kloza of the Oil Price Information Service, Matthew Lewis of Ohio State University, Erich Muehlegger of Harvard University, and the Missouri Department of Natural Resources Energy Center.

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