Friday, March 9, 2012

Serious Gas

As promised recently, it’s time that I get back to posting thought provoking content that doesn’t involve guns or M&M. One of the easiest of topics falling into the thought provoking categories is gasoline prices. This is a topic near and dear to my heart being the moron who bought his lovely and deserving wife a gas snorting behemoth SUV. So much for that extra salary money that came with the new job.

Sitting here typing this, I can look out my office window and see a gas station sign proclaiming that they will sell me a gallon of gas for the low, low price of $3.57 a gallon. Being the numbers geek that I am, I have a spreadsheet where I tracked gas prices (for budgeting purposes) over the last five or six years when I was commuting regularly. The lowest I’ve paid in that time frame was $1.45 per gallon at the end of 2008 and early in 2009. The most I paid was $3.94 a gallon in June of 2008.

So, what has the biggest impact on the cost of that gallon of gas you ask? Simply put, it is the cost of the barrel of oil from which the gas is refined. As of today, West Texas Intermediate crude oil is trading at $107.42 per barrel. There are 42 gallons in a barrel by the way, and I am also ignoring the price differences in the various grades of oil. It is my layperson’s understanding that a gallon of oil can be refined into approximately a gallon of gas with some other by products. So, for the purposes of this exercise, we will assume that there is a one to one oil to gas ratio. If that assumption is correct, a barrel of oil costing $100 translates into $2.38 towards the cost of that gallon of gas at the pump.

That’s just the cost of getting the oil out of the ground. You still have to transport the oil to the refinery, refine it, transport it to a retail location, market it, and pay your friendly, neighborhood gas station owner (not all or probably even a majority of stations are corporately owned). Oh, and let’s not forget the state and federal fingers in this pie.

The exact cost of refining is hard to pin down in a quick Google search, but one website I came across suggested that it accounts for 14% of the cost of a gallon of gas. This percentage fluctuates somewhat depending on refining capacity. You can pump all the oil in the world, and it won’t make much of a dent in the price of gas if there is no capacity to refine it. Supply and demand not only applies to the commodity itself but to the manufacturing process as well. Next time you want to get your blood boiling, take a look at when the last time it was that a new refinery was built in the United States. If I am not mistaken, it was 1976 (although one report indicates that a small refinery was built in Alaska in 1993). Environmentalists and government regulation have seen to it that new refineries don’t get built forcing companies to expand and refit existing refineries which hampers capacity quite a bit.

While we are on the subject of the government, you can thank them for another 13% or so (depending on where you live) towards the cost of your gallon of gas. The federal gas tax is 18.4 cents per gallon. State gas taxes vary from a low in Alaska of 8 cents a gallon to a high of 49.6 cents in Connecticut. Texas, where I live, falls in the middle/low end of the spectrum at 20 cents per gallon. The second lowest after Alaska is Wyoming at 14.5 cents a gallon. If you have a diesel, your federal fuel tax is 24.4 cents a gallon. I’m sure truckers everywhere appreciate that, and don’t think for a minute that cost doesn’t get passed along to you in hirer prices for manufactured goods and groceries.

Last, and least, is the combined cost of transport, distribution and marketing. That gallon of gas does not magically appear at your local station, and it is somewhat ironic that a small percentage of the cost of a gallon of gas is the cost of the diesel fuel it took to power the tanker truck to delivered the gas to the station from local storage tank farm.

The one person in this whole mess who is making the least off of this deal is the station owner. Generally, their mark up is between 3 and 10 cents a gallon. If you use a credit card which charges the retailer a percentage of the sale as a transaction fee, you’ve just cost him money not only on your sale but several others as well. That’s why most gas stations make most of their profits on cokes and candy.

Always at work in this process is the law of supply and demand. When the supply of oil exceeds demand, the commodity price generally falls and vice versa. Little things like Iran chest thumping in the Straits of Hormuz or Israel getting into it with anyone tends to make the oil investors skittish driving the price up a touch. A refinery explosion or a hurricane such as Katrina in 2005 that bullseyes a major petrochem area will significantly impact refining capacity which reduces the supply of the end product again impacting pricing in the same way that seasonal driving habits impact pricing through demand.

So, why do I bring this up? Have you listened to the presidential campaign rhetoric? Do any of you believe those horse thieves will be able to do ANYTHING about gas prices? Not bloody likely. Drill here, drill now is a great sound bite; but, without the refinery capacity to do something with it, it’s only hot air.

Now, pardon me while I go look at used car listings for a cheap, econ box to drive to work.


  1. Do any of you believe those horse thieves will be able to do ANYTHING about gas prices?

    Worst yet in my opinion, not one of the candidates or current office holder realizes a simple fact - it isn't their job to do anything about the price of gas.

    Outside of removing taxes, Not one word of authority for them to reduce the price of gas can be found in the Constitution.

    So we have a bunch of people promising to do something they can't and they have no authority to do -- Yah, that really makes me want vote for them.

  2. Bob, excellent point as always.


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