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Why gas prices vary so much from one place to the next

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The price of gasoline can differ wildly depending on where you live. A driver fueling up in Denver will pay, on average, $3.64 per gallon. But just a couple states over in Chicago, gas goes for north of $4.28 for gallon. That’s about a $10 difference to fill up an average gas tank. Why the disparity?

Gasbuddy.com

James Hamilton has an excellent, chart-filled post breaking it down. The biggest factor is taxes — different states tax gasoline at different rates, depending on how much highway revenue they want to raise (it’s 67.4 cents per gallon in New York and just 38.4 cents per gallon in Texas). Some states, like California, have laws requiring cleaner-burning fuels. That makes their gas more expensive. On the East Coast, two of the nine refineries have shut down recently. That’s driven up prices in the Northeast.

Another part of the story is pipelines. Right now, places like Canada, Montana, and North Dakota are experiencing a boom in oil drilling. Yet there isn’t enough pipeline capacity to carry all that newfound crude down to the Gulf Coast refineries. So they have to sell it at a discount locally. You can check out the variation here. Light sweet crude in Wyoming sells for $97 per barrel. If those producers could send it all down to Louisiana, where refineries have access to larger global markets, they could sell the crude for $125 per barrel. But there aren’t enough pipelines, so they can’t. As a result, states like Colorado and Wyoming benefit from a glut of cheaper oil that has nowhere else to go.

(Indeed, that’s why some analysts think the southern leg of TransCanada’s Keystone XL pipeline, which will run from Oklahoma to the Gulf Coast and is set to begin construction in June, could nudge up gas prices in some parts of the upper Midwest.)

Adding a bit to Hamilton’s post, there are other quirks and oddities in the oil transportation network. For instance, thanks to a wave of refinery closings, the northeastern United States is facing the prospect of gasoline shortages this summer. (Last year the Northeast imported about one-fifth of its gasoline from Europe.) In theory, refineries could just ship surplus fuel from the Gulf Coast up to the Northeast. But any shipments between U.S. ports are covered by the Jones Act of 1920, which means they have to be done by U.S.-built ships that are largely crewed by U.S. citizens.

Trouble is, according to Reuters, there are only about 56 tankers in the world that fit that description, and many are already booked for other routes. So there’s a potential shortfall. As Reuters explains, President Obama has the authority to waive the Jones Act, but then he risks angering his labor union supporters. It’s unclear whether doing so would actually save drivers in the Northeast more than a few pennies per gallon. But it’s yet another reminder that oil markets are rarely as smooth and fluid as they first appear — there are always a few sticky patches.

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