Oil companies do not set wholesale (rack) or retail prices based solely upon the
cost to manufacture and sell gasoline; rather wholesale (rack) and retail prices
are set on the basis of market conditions, including the prices of competitors.
Most oil companies and gasoline stations try to keep their prices at a constant
price difference with respect to one or more competitors. As a result of these
interdependent practices, gasoline prices of oil companies tend to go up and
down together.

In Michigan and Ohio, these interdependent and parallel retail pricing practices
have led to sharp daily increases in retail prices across the states.

Oil companies use zone pricing to charge different prices for gasoline to
different station operators, some of which are in nearby geographic areas, in
order to confine price competition to the smallest area possible and to maximize
their prices and revenues at each retail outlet. For the many stations owned or leased by the major oil companies, it is the major oil company rather than the local dealer that determines the competitive price position of the local station and that benefits from higher prices and profit margins.

The “hypermarket” is rapidly expanding as a highly competitive format for
selling gasoline. The price of gasoline that is paid by consumers at the gasoline pump reflects the cost of crude oil that is purchased by the refiner; the refiner’s processing and distribution costs and profits; the retail distribution, marketing and station operating costs and profits (and sometimes losses); and federal, state, and local taxes. On average, in 2000, the percentage of each of these
components of the retail price of a gallon of regular grade gasoline was:

• Crude oil: 46 percent;
• Refining costs and profits: 14 percent;

Federal excise taxes are 18.4 cents per gallon and state excise taxes average about 20 cents per gallon. Also, some states levy additional state sales taxes, some of which are applied to the federal and state excise taxes. Additional local county and city taxes can have a significant impact on the price of gasoline.

• Retail distribution, marketing, and station operations: 12 percent; and.
• Taxes (not including county and local taxes): 28 percent.353

Although retail prices can be broken down into these various components, neither refining nor retail prices are established on a cost-plus-profit basis. The wholesale price a refiner can obtain for refined gasoline is determined largely by the factors influencing the then-current supply and demand situation, including the market’s outlook for the future. Competitors’ prices also are considered. Similarly, the price a retailer will charge for gasoline on any given day will
reflect prevailing market conditions, including the retail prices of nearby competitors. Thus, the profit margin a refiner or retailer obtains depends on the current market conditions.