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Gas prices are dropping but will we see $2?

This is welcome news for many families after the back-to-school rush that has put a strain on already tight budgets.

How Gas Prices are Determined

Gas prices typically fluctuate on a daily basis and the price at your local pump won’t necessarily be determined by the price you find at a gas station three miles out of town. However, prices do tend to be fairly similar in the same geographical markets. But what leads to the price you pay at the pump, and why do state-by-state costs vary so drastically?

According to Matthew DiLallo, a Senior Energy and Materials Specialist with The Motely Fool, four factors influence the cost of gasoline – with three playing into the disparity between states. Contrary to popular belief, the value of crude oil really doesn’t have a major impact between states. While it does account for around half of the price of gas, the fact that crude oil is traded in a global marketplace means every state is on a level playing field. That leaves three contributing factors that directly correlate to price discrepancies.

The cost of refining oil into gasoline accounts for 22 percent of the price you see at the pump, with local environmental regulations playing an important role. That’s why California – with the strictest environmental regulations in the entire nation – has the highest gas prices.

Taxes make up 17 percent of the cost at the pump. Over the course of this summer, taxes per gallon have ranged from $0.35 (South Carolina) to $0.66 (California). It may not seem like a lot, but those differences add up quickly.

Finally, distribution and marketing costs also impact gas prices. The greater the distance between refinement centers and the end destination, the higher the cost will be. “It’s one reason why southern states [like] South Carolina, Mississippi, Alabama, Tennessee, and Louisiana have the lowest gas prices in the country as they are closer to America’s oil-refining center along the Gulf Coast – they benefit from lower distribution costs as the gas doesn’t have to travel as far,” writes DiLallo.

Looking at the Current Price Landscape

Looking around at the current national landscape, you’ll notice that – in addition to southern states – northeasterly states like Maine, New Hampshire, Vermont, and Massachusetts also have friendly consumer prices. West Coast states and those surrounding the Great Lakes account for the highest prices.

However, ‘high prices’ are relative. Gas prices dropped 6 percent last month to $2.59 per gallon, with oil prices plunging 16 percent over the same period. That’s good news for the general public. “There will be thousands, even tens of thousands of stations below $2 by the time we’re into football season,” says Tom Kloza, a chief oil analyst for the Oil Price Information Service. He even thinks we could drop another 60 or 70 cents per gallon by as soon as September or October.

The Cost of Lower Gas Prices

But are there actually unforeseen consequences and hidden expenses to lowering gas prices? While it may save the average driver a few dollars each time they fill up, it could cost a lot more in the long run. According to Guangqing Chi, a South Dakota State University sociologist, there’s a pretty steady correlation between the number of traffic fatalities and gas prices in the U.S.

The logic is that as prices drop, more drivers hit the road. This includes teenagers who are very price-conscious when it comes to filling up. Another factor includes less cautious driving habits. When gas prices are cheaper, drivers know they can accelerate faster and take more chances. Chi claims that a $2 drop in gas prices translates to around 9,000 more fatalities per year.

The Rest of 2015

While there’s no way of predicting the exact price of gas at the pump, numbers do seem to suggest gas prices will stay below $3 per gallon across most of the country for the remainder of the year. If experts are right, it’s possible that we could even see $2 come November. Just remember to be safe and drive with extra caution next time you snag a good deal at your local pump.

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