Why do gas prices vary state to state? It's not just taxes.

Gas prices vary in part because refiners have to create more than 50 blends of gasoline to satisfy requirements of certain states, even cities. When shortages occur, local gas prices soar.

Mike Blake/Reuters
Current gasoline prices are shown at a gas station in Encinitas, Calif., Oct. 8, 2012. There are at least 55 blends of gasoline in the US, because California and other states demand special blends, which can cause local gluts and shortages. That's a key reason gas prices vary so much around the US.

With the recent spike in gasoline prices bringing that commodity to the forefront of the news again, you might wonder why gasoline is priced so different in different parts of the country.

Why are prices always higher in California and Chicago, and lower in other places? Certainly taxes has something to do with it, since some states like New York tax at a higher rate than, say, New Jersey.

But there is much more to it than that.

Most people think that there are three to six different grades of gasoline. Actually, the reality is that across America, at least 55 different blends of gasoline are sold. I say “at least” because I have researched this and found that no one knows exactly how many blends are sold — some say it could be as many as 70.

Why does no one know for sure?

The reason is simple. The federal government has left it up to the states to decide or mandate the cleanliness of the gasoline that each state, or in some cases local municipality, will sell. By “cleanliness,” I mean how cleanly the gas burns — how much burning the gas will affect the atmosphere. In the simplest terms, this has to do with the chemicals added to the gasoline. Adding ethanol to gas is one way to affect the cleanliness. I say 55 to 70 blends because some of the legislation is working its way through the system as I write this.

What does all this mean? 

Well, different make-ups mean that the gas that is allowed to be sold in New York is different than the gas that is allowed in New Jersey. The City of Chicago has its own gas. St. Louis has a certain kind of gas, East St. Louis across the Mississippi has a different kind, and the suburbs around both places have another. As you can imagine, this is a nightmare for refiners and the gasoline distributors, and most certainly adds to the cost to produce it. That’s just simple economics — it is cheaper to produce one uniform good than it is to produce many versions of it.

It also causes shortage problems like those we are currently seeing on the west coast. Yes, California and the rest of the world have seen many refinery problems and a few closures, especially on the east coast and in the Caribbean. And of course, the large refinery explosion that recently happened in Venezuela did not help. That said, there are other refiners around California that could help make up the shortage, but they are not allowed to, because the gas they produce is not allowed to be sold in that state.

I believe this is one area in which the Feds need to step in and make some changes. The federal government needs to mandate that the gas allowable for sale around the country is more uniform in its make-up. They should eliminate most, if not all, of the different blends. I have talked to cash gas traders and people on the refining level, and they all are in agreement that these changes are long overdue. They say that the logistics of making and distributing all the different blends is becoming impossible We all want clean air, and I believe that even if the cleanest form were mandated, it would still ease prices around the country by reducing the number of blends that refiners would have to make. At the least, this topic certainly deserves more attention from the Department of Energy.

– Anthony Grisanti is founder and president at GRZ Energy, a commodities trading and execution firm specializing in energy.

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