Posted by
John Caile on Tuesday, March 08, 2011 12:44:05 PM
There is no magic to
the price of gas. At $3.89 a gallon, about where prices are today (or soon will be) the components break down
approximately as follows:
$2.64 - Cost of
Crude Oil
$0.48 - Taxes (and
up to $0.68 in some states like Hawaii)
$0.33 – Refining
$0.30 -
Distribution/Marketing/Retail Cost of operation
$0.09 - Profit to
Refiner (EXXON, BP, etc.)
$0.05 - Profit to
gasoline retailer (BP, Shell, EXXON, S/A, Holiday, Kwik-Trip, etc.)
Obviously, the oil
necessary to produce gasoline is the biggest cost item. But where does the oil
come from? Most people would immediately think of large, multinational
corporations like EXXON/MOBIL, BP, Shell, and others. But they would be only partially correct. The reality is that less than a third of the world's
oil comes from so-called "Big Oil" - the vast majority comes from hundreds of
small, independent outfits with fewer than 100 employees.
Adding to the confusion is that the term "oil company" can mean some
very different things. Most people think
of EXXON, Shell, BP and others - names they see on the gas stations in their own
neighborhoods. But while they do indeed "drill for oil" many of these companies are also major gasoline retailers, and are therefore huge
CONSUMERS of oil.
Meanwhile, many major producers of oil are not private, for-profit companies, but are in fact government owned entities like Venezuela's "Petroleos
de Venezuela" (PDVSA) or ARAMCO of Saudi Arabia. These organizations
SELL crude oil to gasoline refiners/retailers (like EXXON and BP), as well as to tire
companies, plastics producers, and other manufacturers of petroleum-based
products. (Note: these oil-consuming manufacturers are many of the same companies that are unjustly demonized as "speculators" for simply attempting to lock in their costs in advance of potentially rising prices. But that's a story for another day).
Thus, contrary
to popular perception, when oil prices are high, it does not benefit the refiners/retailers (like EXXON, BP, etc.) - in fact, high oil prices result in SMALLER profit margins. Why? Because oil
prices are to a gasoline refiner/marketer what wheat or corn prices are to a
cereal producer/marketer like General Mills.
When the cost of the "raw
material" used to make ANY product goes up, retail prices may rise but margins
shrink. For example, in 2007, when gasoline averaged less than $3.00 a
gallon, EXXON made a net profit of 10.8%, but when gas was $4.00 a gallon in
2008, their net profits DROPPED to 10.6%. Note that this is EXXON's profit on ALL operations - gasoline is one of the least profitable products, generating less than 9 cents a gallon.
Now, naturally, the mainstream press touted the “huge increase in oil company
profits” in 2008. But what they failed to point out is that while EXXON made
LESS on each gallon of gasoline they sold (around 8 cents), they sold MORE TOTAL
GALLONS (due to huge increases in demand worldwide - Americans
alone burn 10,000 gallons of gasoline EVERY SECOND). So of course the total
profits in dollars went up, but the net profit percentage fell.
And for those who
advocate “the government” controlling gasoline prices, a lesson in basic economics might be useful. Just ask yourself this
question: If you were a gasoline refiner/distributor, and it cost you approximately $3.75 to refine and distribute a
gallon of gas, and the U.S. government were to set the maximum pump price at, say, $2.50, how much
gasoline would you produce for use in the United States?
Answer: Zero.
Because the cold harsh reality is that gasoline (just like oil) is a WORLD commodity - and no matter where it comes from, the price will be set by the world market. And NO commodity will go where the cost exceeds
the price - it will go elsewhere, or cease being produced altogether.
It took decades of destructive and misguided liberal policies to get us where we are today: no new gasoline refineries in 30 years, no new nuclear generators since the 1970s, blocking the use of our huge reserves of coal, the incredibly disastrous burning of our corn for fuel (Ethanol) which not only reduces your car's mileage, it has pushed food prices through the roof. Then there are the mountain of silly "green" initiatives to combat a mythical threat (global warming). All of these policies should be reversed.
But the bottom line
is that in the short term it is simply insane for America NOT to drill everywhere
we can, as fast as we can. Especially since the rest of the world is already doing exactly that
- some of them right in our own back yard.