It's time to do away with a few myths about the price of gasoline. This podcast will help destroy some common myths:
The myth of "they". "They" get blamed for everything, including high gasoline prices. But who are "they"? Do "they" really exist?They myth of "greedy oil companies". Companies of all kinds pursue the maximum profit because they have a fiduciary duty, but are oil companies unlike other companies?The myth of who makes the most money on a gallon of gas. The answer will surprise you.The myth of oil companies controlling the market supply of gas and oil.The Myth of "They"
"They control everything." "They make you pay whatever they want." Everyone has heard these kind of comments, or made them. But when asked, nobody seems to know quite who "they" are. It is the tendency of people to suspect a conspiratorial force that has the power to control things. The reality, though, is there is no real "they". The world is much more chaotic than people realize. Sometimes, it's more comforting to believe someone is in control of things. The bottom line: when it comes to gasoline pricing, there is no "they."
The Myth of Greedy Oil Companies
The truth is, only one American oil company is among the top producers in the world. According to a 2010 article in Forbes Magazine online, here are the top ten oil companies in the world:
Aramco, Saudi Arabia 8.2 million barrels per day National Iranian Oil Company, Iran 3.8 million barrels per day Pemex, Mexico 2.9 million barrels per day Iraq National Oil Company, Iraq 2.5 million barrels per day Exxon Mobil, USA 2.5 million barrels per day BP, Great Britain 2.5 million barrels per day CNPC, China 2.3 million barrels per day ADNOC, Abu Dhabi 2.3 million barrels per day Kuwait Oil Company, Kuwait 2.3 million barrels per dayPDVSA, Venezuela 2.2 million barrels per dayThe Myth of Who Gets Gas Profits
According to the U.S. Energy Information Administration, a 42 U.S. gallon barrel of crude oil yields about 45 gallons of petroleum products. This gain from processing the crude oil is similar to what happens to popcorn, which gets bigger after it is popped.
Once refined, those 45 gallons of product are broken down as follows:
19 gallons - gasoline12 gallons - diesel6 gallons - other products4 gallons - jet fuel2 gallons - liquified petroleum gases2 gallons - heavy fuel oil and home heating oilProducts from a 42 gallon barrel of crude oil
Gasoline, comprising about 42% of a barrel's output, would cost about $2.22 per gallon in terms of the price of the oil itself, if a barrel of oil cost $100. Assuming the cost of the shipping (ie., pipelines & tanker ships) and processing (refineries) are largely sunk costs, and therefore negligible in terms of additional marginal cost for making a gallon of gas, the oil company would add about 28 cents, or 11% to the price of the gas sold to a gas station. Exxon/Mobil averaged about 10% margin on sales. That puts the price to your local gas station, at about $2.50 per gallon.
Then the gas station, naturally, must mark up their cost to you. Let's assume their take is about the same as Exxon/Mobil's and they add another $0.25 to the price, making it $2.75. Your're probably wondering why you don't pay $2.75. That's a good question. Strap in, kids. Here's the answer:
GASOLINE TAXES
Federal taxes on gasoline sales are about 18 cents a gallon. State taxes vary considerably, which is why you see such variation between states in the price of gasoline. In New York, for example, gas taxes amount to more than 60 cents a gallon. Methodologies can vary because there are so many different taxes levied on fuels and gasoline is a big target. One reason for the variation results from sales taxes which are dependent on the price of the gas. Some states charge a percentage sales tax on the gas you buy, and the amount you pay is more, if the base price of a gallon is higher. The Tax Foundation publishes a report on state taxes on gasoline.
All together, in New York, about 80 cents per gallon is added to the price of gasoline for taxes.
The next time you hear a politician or a friend tell you how greedy the oil company is or the gas station owner, ask them if they know how much in taxes they pay per gallon. Chances are, they won't know.
So let's do some adding up:
$2.22 the cost per gallon of gasoline to the producer assuming a $100 per barrel
$0.28 the profit margin to the gasoline producer (eg., Exxon)
$0.25 the profit margin to the gas station
$0.80 the taxes on a gallon in New York State
$3.55 the approximate price for a gallon of gas
The Myth of Deliberate Supply Restrictions
Very little widespread "gaming" of the system goes on in the oil business.
When your local gas station raises the price of gas the day after a news stories breaks about a refinery disaster or some other supply disruption, people are naturally suspicious that the station owner is taking advantage of the situation. But is he?
Let's say the typical busy gas station gets delivery of 40,000 gallons of gasoline every two weeks. If a national supply disruption causes the price to the dealer to go from $2.50 to $2.65, it means the station owner must come up with an additional $6,000 to pay for the next delivery in less than two weeks. Also, some oil companies have a minimum order, so it is also possible that the station owner won't be able to lower the order to something more accommodative to his cash flow. If these conditions exist, then the gas station owner must raise gas prices as soon as possible to have enough cash available for delivery. Rather than being gouged, the gas station is protecting his business and his customers.
This is not to say that gouging never happens. But more often than not, gas stations are just trying to keep up with the price fluctuations to keep their businesses going.
Sometimes, when oil companies expect the price of crude oil to increase in the short or intermediate term, they ease back on production. This gaming of the system has its shortcomings, because a cut in production could result in a loss of market share. Also, if the prices don't rise as expected, there is a lost opportunity. Even if the prices increase, the company must weigh the opportunity cost of leaving the oil in the ground for whatever the time period may be and compare it to the expected gain from the increase in price. All of these things are legitimate ways to maximize profit and are neither unlawful or unethical. Companies are doing what consumers do: maximizing the benefit to themselves. Just as consumers look for the best buy, companies seek out the most profitable exchange. They are two sides of the same coin.
WHAT NEXT?
♦Don't believe everything you hear about gas prices.
♦Check out the sources linked to in this article for yourself.
♦Then, the next time your friends talk about gas prices, show them what you know and tell them about greatvocalmajority.com