Bentzen’s Blog

About Gasoline
by Brian Bentzen

It’s summer time and gasoline prices are rising again.  Hopefully we won’t see $4.00 a gallon gasoline anytime soon, but prices are already over $3.00 in California.  I fill my tank about once a week.  If I spend $30 a week on gas, that adds up to $1500 a year.  That is quite a significant portion of my salary so I set out to determine where exactly the money is going.

Oil refineries obtain their oil at the market price.  If a company does both exploration and refining, the oil still must be sold to the refinery at market cost.  Regardless of where the oil came from it gets sold at market cost.  In Saudi Arabia, it is cheap to lift oil, costing probably less than $10 a barrel.  To lift oil from the Gulf of Mexico, the costs are at least double.  (1)  Oil exploration is where the money is made.  Selling $10 or even $20 worth of product for $70 will make a country like Saudi Arabia rich.  It’s a good deal for a corporation like ExxonMobil as well, although ExxonMobil has to pay royalties and taxes on their production.  Of Exxon’s 2008 profit of $45.2B, $34.5B was from production of oil and gas.  Once in the refinery, one 42 gallon barrel of crude oil is refined into a variety of products.   About 45% become gasoline and 26% becomes diesel.  9% becomes kerosene jet fuel.  3% winds up as asphalt. There is a wealth of data available on refinery products from the Energy Information Administration (2).

Today at Rutter’s I payed $2.65 per gallon for regular.  Back in March of 2009, Rutter’s would have bought gas for $1.376 and resold it for $1.473, a profit of $0.097 a gallon. Prices then would have been closer to $2.26 (5)  I usually pay with my credit card, so the gas station probably was charged about 3 percent, or $0.0795 in fees today and would have been charged $0.678 in March.  After paying the credit card company the gas station would only make $0.0292 per gallon.  This explains why everything is so expensive inside a Rutters.  They have to make their money somewhere!  Pennsylvania charges a tax of $0.323 per gallon.  (find your state here)  Uncle Sam charges $0.184 per gallon, which is more reasonable than I thought it would be.  This adds up to $0.507 in taxes or 19.1% at todays prices.  As gas prices increase the government gets the same nominal amount, so the percentage tax will decrease.

Gasoline Taxes by State (from factsonfuel.org)

Refining, distribution and retailing costs $0.48 a gallon according to the American Petroleum Institute.  (4)  This price has come down significantly over the past 25 years from a inflation adjusted $0.99 per gallon to $0.48 in 2005.  I suspect this cost is now lower than it was four years ago.  This decrease is cost results in a decreased real cost of gasoline at the pump as shown below.  The spike in price is impressive.  If oil returns to its trend, it will become less expensive.  Demand for oil is back on the rise and worldwide there is very little capacity for increased production.  With increased demand from China, the near-term price of oil and gasoline is unpredictable, but last time I checked, increased demand will mean increased price.

Real vs Nominal Cost of Gasoline (Energy Information Administration)

According to Exxon’s annual report, in 2008, they had $477.36B in sales, $81.75B in profits before income taxes and $45.2B in profit after paying taxes.  They payed $36.55B in income tax, but also payed $34.5 in other taxes related to production and $41.2B in other taxes and duties for a grand total of $112.25B in taxes last year.  Their profit margin was 10.56% after taxes, which isn’t bad considering the government collected 2.48 times that amount in taxes.

What can I take away from this?

Gas prices probably aren’t going to go down.  There is increased demand from China and the supply of oil is not increasing.  Saudi Arabia and Canada are the largest remaining oil reserves, but they don’t have much room to increase production.  The federal government is considering adding additional taxes to gasoline.  Prices are going to go up!  If this concerns you, or if you think that our oil based economy is going to suffer, you are in my corner.  There is a solution.  The solution is the same as we’ve known for decades.  Reduce consumption.  Increase efficiency.  Discover alternative sources of fuel and energy.  As a nation we’ve increased efficiency but increased consumption.  You can decrease your own consumption and save money in the process.  We’ve discovered alternative sources for fuel, but they are not yet economically viable.  We are in a period of limbo.  We know oil is limited, but haven’t found a viable solution.  In time, the solutions will be available.  Companies like Valcent, which uses new technologies to more efficiently grow algae and harvest them for oil may provide for our energy needs in the future.  Wind or solar might alternatively be the answer.  When these growing technologies surpass oil, expect to see some big changes.

Until then, continue pumping.