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Why gas prices vary from state to state

  • Story Highlights
  • Price of a gallon of gasoline at record high national average of $4.086 on June 30
  • Alaska has the highest gas prices in the nation, Missouri has lowest
  • Fuel prices rising because of high demand for petroleum products worldwide
  • Gas taxes and ability to access fuel determine state price of gasoline
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By Craig Howie
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(AOL Autos) -- Price of gas got you crying at the pump? Is it eating into your household budget? Well, get used to it.

Gas in California, the second worst state, hits $4.59 per gallon for regular unleaded in this July 14 photo.

Gas in California, the second worst state, hits $4.59 per gallon for regular unleaded in this July 14 photo.

That's the word on the streets as the price of a gallon of gasoline soars to record highs.

With regional differentials pushing the price much higher in some places, drivers and small-business owners are finding it hard to cope.

But which states' motorists get the best deal, and in which states do drivers pay the most to fill-up?

Here come the numbers

Alaska has the highest gas prices in the nation, with a gallon of regular gasoline at $4.623, followed by California at $4.583 as of June 30. Hawaii, Connecticut and Washington make up the top five states with highest prices, with New York and D.C. not far behind at $4.292 and $4.160 respectively.

Best states to buy gas? Missouri comes out top at $3.862 for a gallon of regular, followed by Oklahoma at $3.866, South Carolina, Mississippi and Arkansas. Iowa, Kansas and Alabama are next in line. AOL Autos: Cars with 30+ MPG for $300 or less per month

Past prices

We use the term 'best states to buy gas' with this caveat: Back in June 2004, gas hovered at around $1.74 a gallon, according to figures from gasbuddy.com.

Geoff Sundstrom, AAA's fuel price analyst, said the primary reasons for rising fuel prices are an increase in demand for petroleum products across the globe and a need for investment in refining infrastructure.

"Right now, it is almost impossible to know where oil and gas prices will be in six months to a year," he said. "It's easy to assume that the world economy will continue to grow, we are very clearly at risk of an economic downturn and perhaps a severe economic downturn which could influence the demand side to the point where oil and gas prices may drop.

"In 10 to 20 years out, oil and gasoline will continue to be more expensive. But given what's happening in the markets right now, there is some potential that [the] demands side of the equation could fall off a cliff." AOL Autos: Consumer Reports on best fuel-efficient used cars

Why so expensive in California?

Marie Montgomery, spokeswoman for the Automobile Club of Southern California, says the primary reason behind the high price of gas in California is "market segmentation," a marketing term that basically means California (along with many other states) has developed a "boutique blend" of fuel in a bid to uphold environmental or ecological standards. In California's case, this blend helps clear the state's notorious smog.

"We can't use gas they made for Iowa. We use a special blend with additives in it, an ethanol mix," Montgomery said. "When you do that, you can only use refineries that make that gas [mix]. The refineries in California are a major supplier, but, when prices are high and there's not another supplier, we have to go where they make that mix."

She pointed out that refineries in Oregon and Washington produce the gas product, and there is a pipeline to Alaska, but that the only other options are shipping in the blend from elsewhere in the nation or Asia, which is not cost-efficient.

"People have to figure out how to deal with this on a long-term basis. We've been telling motorists to carpool and here we are in summer, and prices have barely come down," she said. "Usually we're about a month into a downturn, it's cyclical: Prices go up in spring and spike in May, which isn't happening this year. Prices may not come down a lot."

Less misery in Missouri

Michael Right, vice president of public affairs for AAA Missouri, said his state is usually among the top three in terms of low gas prices. A contributing factor, he said, is that the state's per-gallon tax rate is the lowest in the nation.

He said that most, if not all, states impose a tax on gasoline but few are as low as the 17 cents a gallon Missouri levies. And Missouri, unlike most other states, doesn't impose a sales tax on top of that.

The state also benefits from good distribution via a crisscrossing network of pipelines which can, unusually, result in cheaper gas in rural areas than in major cities.

The reason for this is the three types of gas used in the state. St Louis primarily uses reformulated gasoline. Conventional gas is sold in rural areas, and Kansas City uses low RVP (or low-emission) gasoline. Reformulated costs more than conventional gas, hence the higher cost in cities.

"In Illinois, it's not unusual to save 15 cents a gallon by crossing the river," Right said. AOL Autos: Best hybrid SUVs

Effects on station owners and operators

While the effects of soaring pump prices on consumers are well documented, owners and operators of service stations nationwide are also feeling the pain acutely.

Dennis Decota, the executive director of the 135-year-old California Service Station and Automotive Repair Association and owner of a service station in Marin County, California, said high prices are "extremely detrimental to business people. What it does is creates a financial hardship on customers, [leading to] less foot traffic to stores or repair facilities. It puts a strain on entire businesses; unbranded service stations are really at the end of their rope."

Independent, unbranded stations have one retail philosophy: Offer the best price. They rely on oversupply by refineries which they buy at wholesale prices and sell cheaper than the branded competition, like Shell or Exxon (which have both announced they are quitting the service-station industry).

But in the past six months, that supply curve has become inverted, which means owner-operators are paying more -- $37,000 a truckload -- for their gas than branded outlets. Decota noted some are losing as much as 15 cents a gallon on every sale. It's a hard time for the industry, he said.

The blame for high oil prices is pretty evenly spread, Decota said. He did, however, point out that as a result of higher gas prices, California brought in $4.4 billion last year in sales taxes from its monthly sales of 1,300,000,000 gallons. In 2002, when gas prices averaged about $1.71 a gallon, it brought in $1.7 billion.

DeCota advocates boosting refinery capacity from its current level of 88 percent to about 92 percent. He said refineries "have their hands on the spigot. There is no shortage of crude. But if the government stepped up refinery capacity, that would put enough downward pressure to create competition among refineries. And my guys are going under." AOL Autos: 10 hot small cars

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