Last year, because of high oil and gas prices, the big five oil companies BP, Chevron, ConocoPhillips, ExxonMobil and Shell posted over $123 billion in profits. In 2007 ExxonMobil’s net profit was $40.6 billion, the highest profit ever recorded by a public U.S. company. Shell, too, posted a record profit of $31.3 billion; Chevron made a $18.7 billion profit; ConocoPhillips posted a gain of $11.9 billion; and BP made $20.8 billion in net profit

Despite the mega-profits recorded by big oil, independent gas station owners may actually lose money when prices go up. That may sound counterintuitive, but in order to attract customers, gas station owners have to keep their prices low and cannot always pass on their costs to consumers.

Before we examine what affects the prices at the pump, let’s take a look at what makes up the retail cost of a gallon of gasoline. In March, the retail price of gas was $3.24. Breaking down that number, 72% of the cost was crude oil; 8% spent on refining; 8%, distribution and marketing; and 13%, taxes, according to the Energy Information Administration, statistical agency of the U.S. Department of Energy.

Currently, the U.S. average retail price for regular gasoline is $3.57 per gallon. The price varies from region to region, based on a number of factors, including transportation costs to get the gas to a retail station, real estate prices– a gas station owner who’s paying a high rent is going to have to recoup some of that money from consumers – and most significantly, taxes. In California, where the state adds another 38 cents to the already high cost of gasoline, consumers are paying nearly $4.00 a gallon. In contrast, consumers who live in close proximity to refineries on the Gulf Coast pay $3.50 per gallon.

There are a number to reasons why the price of gasoline goes up and down, including changes in the price of a barrel of crude oil; geopolitical tensions; and economic conditions in the countries purchasing the oil, not the countries receiving the cash, according to Mark Waggoner, president of Excel Futures in California.

“For example, if the U.S. is having economic turmoil and oil companies can’t afford to buy the oil, they’ll buy less so the demand goes down and the prices go down,” he said.

But supply and demand is probably the main reason for the fluctuation in the price of a barrel of crude oil, the price of a wholesale gallon of gasoline and the price of a retail gallon of gas.

“The dollar is having a major impact on the price of energy,” [Flynn] said. “The leap that the price of oil has made is unusual and it’s really not because of a supply disruption or war in the Middle East but because the Federal Reserve is trying to save the housing market by creating a situation where they are devaluing the dollar.”

“Although some people think gas prices come from outer space, and some people think that they’re made up in the back rooms of ExxonMobil, the reality is that the prices of oil and gas are set on a global market with the convergence of buyers and sellers that create a process that determines the price of a barrel of crude oil on a particular day, and at a particular time,” said Phil Flynn Vice President, Energy and General Market Analyst with Alaron Futures and Options in Chicago. “Obviously those prices are also determined by supply and demand. And the futures market is supply and demand in its purest form – if there are more buyers than sellers the prices go up, if there are more sellers than buyers the prices go down.”

The question right now, though, is why are prices continuing to go up, even though there is evidence that demand is going down? The answer is because the price of a barrel of oil is priced in the world market and it’s priced in dollars, Flynn said.

“The dollar is having a major impact on the price of energy,” he said. “The leap that the price of oil has made is unusual and it’s really not because of a supply disruption or war in the Middle East but because the Federal Reserve is trying to save the housing market by creating a situation where they are devaluing the dollar. And because the rest of the world buys oil in devalued dollars, they want more dollars for a barrel of oil.”

When the price of a barrel of crude oil changes – the current price is $115.63 per barrel – the wholesale price of a gallon of gas that the gas station owner pays also changes – the current wholesale price is right around $2.95. That means if a gas station owner is paying more for a gallon of gasoline, he’s going to pass some of that increase on to consumers.

It appears that an increase in the price of crude oil sparks an immediate increase in the price of gas at the pump. But is that really the case? Well, it depends on who you ask.

Gas station owners immediately react to the cash market because they have to fill their tanks just like the rest of us do, Flynn said. So when the price of crude spikes up very quickly, they increase their prices just as quickly because they know they’re going to have to pay more to buy gas tomorrow to replace the gas they sold today, he said.

“In this business there’s an old saying, ‘prices rise like a rocket and fall like feather.’ And there’s a little bit of truth to that because gas station owners don’t really make much money when the prices go up and sometimes they actually make less money,” he said. “So when the prices start to come down, because the gas station owners lost money on the way up, they’re probably not in a real hurry to bring prices back down. They want to try and make up for some of the money they lost on the way up.”

So hard as it may be to believe, it really is a very difficult time for the gas station owners who are also upset because they don’t like these high gas process any more than we do, he said.