Gas Tax Economics 201

If any of my (few) readers are knowledgeable about economics, and the economics of gas prices in particular, please chime in.

In support of my earlier post, calling for a temporary suspension of gas taxes, I wanted to explain why I though this would work. I have read a counter-argument that because gasoline is a commodity, it will rise to the pre-tax cut price.

My (admittedly limited) understanding of gas price economics goes like this: There is an international market for oil, price X. Refiners refine the oil into a finished product such as gasoline (or diesel), blend it as necessary, and sell it to retailers at some price, which is X+margin+fuel tax. Retailers get the gasoline, mark it up for retail, and sell it at (x+margin+fuel tax) + retail margin. The core price, X, is set by international demand and market economics, such as speculation. The refined fuel price is set also by refining capacity. The gas pump price is changed mostly by local effects, such as local runs or local competition.

I have heard that the gas station business is a low margin business, and the real money is all made on beer, cigarettes, coffee, and junk food. The primary price mechanism happens at the distributor level.

So my prediction is, that if the federal and state fuel tax applied to the refined product was dropped, the price of gas at the pump would drop by about that amount, unless increased demand caused the refiners to increase the price to the retailers.