The Real Cost of Gasoline

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The gas cost issue has been on the front burner over the last week and I just had to address this issue, again, as I’ve done in various places in the past. The lack of knowledge about gas prices demonstrates one of the most glaring examples of societal economic ignorance in our country. This ignorance really boils down to a poor grasp of basic economics and costs of goods. Our current educational system, including college education, significantly lacks economic and financial education, in spite of our daily dealings with these subjects and their impact on our lives.

The current clamoring to take it to “big-oil” to “fix” our gas prices sounds real good as a sound bite at a political rally, but will do little to lower the price of gas at the pump. As you can see in the the graphic and tables below, oil company profits (buried in the numbers for costs and profits from refining, distribution, and marketing) make up a very small portion of the cost of gas at the pump. Additionally, this profit margin has remained virtually constant for the past eight years, in fact it has decreased in the last two years, while prices have gone up. This means the record profits of oil companies are due to record demand!

One popular solution suggests taxing these record profits. While you may get some temporary joy from “sticking it” to the big corporations, you will only see this tax passed on to the consumer as an increase in costs of goods sold, so in actuality, you will be paying that tax at the pump. Another solution has the government doling out money to everyone to help stem the tide of costs of all goods, including gas. Isn’t this equivalent to the economic stimulus package that was just panned by the two Democrat presidential candidates that are in favor of these plans?

California Dept. of Energy - May 2008
73.5% cost of crude oil
17% Federal, state, and local taxes and fees
9.5% Total COSTS and PROFITS for refinery, distribution, and marketing

In spite of record profits for oil companies, economically speaking, they still aren’t charging enough for gas. What??!! I can hear the audience roar. Economically, oil companies (and any for-profit organization) should charge as much as the market will bear without diminishing demand. Currently, these record profits (not profit margins) are due to record demand from the consumer and decreasing supply of the key component of gasoline, crude oil. While one may make the argument that gasoline is a necessity, the current demand far exceeds that necessity. Many different options exist to reduce your demand of gasoline, including walking, bicycles, car-pooling, and using public transportation. All of these options require sacrifices; a foreign concept for most Americans. We would rather have some big, evil corporation to blame and go on living our lives without consequence.

As to the supply, our representative government has found excuse after excuse to avoid tapping into our own possibilities of oil supply throughout this country for decades. Additionally, no new refineries have been built in over 30 years. You will note that the largest component of the cost of gasoline is the cost of crude oil; a commodity susceptible to open, free market forces trading at record numbers. OPEC has indicated and outright stated time and again that they can send us more oil, but we can’t do anything with it when we get it, due to our very limited refining capabilities. Although oil is a relatively finite resource (in spite of the fact that more is being produced everyday through earth’s natural activities that produced the same oil we are harvesting, now), there are abundant sources of oil within our own borders waiting to be tapped and refined. The current explanation for our country’s lack of action refers to the amount of time it will take to build new oil fields and pipelines and infrastructure. I say every day we use that excuse is one more day lost in developing that infrastructure. Ten years ago, President Clinton felt that 10 years was too long to wait to get oil out of ANWR. Now, ten years later, we could have had our own additional oil supply, rather than begging Saudi Arabia to bump up their production.

Additionally, this supply will run out at some point in our future and a reasonable, viable alternative will be required. Currently, the “big-oil” companies are spending more on alternative fuel research than any other single entity. No kidding! They want to continue to make profits from energy consumption; they are not picky which energy source produces that profit. Should the Democratic party get it’s way and tax these profits or nationalize the oil/gasoline industry, this research will shut down and we will be as far from a viable alternative fuel as we are from tapping our own oil resources.

I’m not a fan of paying $5/gallon for my diesel fuel, but I certainly do not blame “big-oil” for doing what for-profit corporations do best; make a profit! As is almost always the case, the solution does not reside with new laws, new regulations, additional government, and a further march to socialism. As is always the case, the solution resides with each and every one of you. Find ways to use less, consume less, ways to help with alternative fuel development, and find new ways to get around while using less energy (hint: it’s not with a hybrid or ethanol) all without demanding the government force your will on the American people and American business at the point of a gun.

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