RALF SEIFFE |
Chicago Columnist Illinois Leader Political Analyst Entrepreneur Business Advisor Chicago Illinois Review |
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SEIFFE: Gas PricesWednesday, May 16, 2007 By Ralf Seiffe Recent trips to the gas station have
been painful enough for me to wonder if a mere mortal could understand
gasoline prices by looking at the petroleum industry’s publicly-available
statistics. The news media seems unable to make the situation
understandable and Congressional blathering, particularly that of the senior
Senator from New York, are simply increasing the planet’s carbon dioxide
burden. These latter-day William Jennings Bryans are convinced we’re
being crucified on a barrel of oil and they intend to profit from exposing
the wickedness only a Congressional subpoena can reveal. One way to get a grasp on the oil
situation is to understand some basic numbers. The universal measure
of oil is a “barrel” which consists of 42 gallons of petroleum.
This unit is a holdover from the mid-19th Century Pennsylvania when oil was
shipped in wooden barrels. John D. Rockefeller became one of the
world’s wealthiest men by developing larger conveyances and pipelines to
move the product more efficiently making barrels obsolete nearly 140 years
ago. Despite the anachronism of the
barrels, The United States consumes about 20 million of them every day.
We import six out of ten or about 12 million barrels per day, making the
United States the world’s largest consumer. At $60 per barrel, we
print and export about three-quarters of a billion dollars to a market
dominated by friends like Hugo Chavez, Vladimir Putin and the benefactors of
the madrassas who produce terrorist graduates. This analysis gets more interesting
and relevant when these tank car numbers are translated into units that
compare with those with which consumers deal. This means barrels to
gallons and dollars. Since a barrel of crude oil costs around $60, the
cost of a gallon of crude is about $1.43. From each barrel, refining
extracts about 19 gallons of gasoline, 10.5 gallons of Diesel fuel and about
4.1 gallons of jet fuel according to the Energy Information Agency.
Assuming the remainder of the barrel’s yield can be sold for the same
price as these liquid fuels--say $3.00--the gross profit on a gallon is
about $1.57. There are costs associated with
refining, transporting and marketing the product. If that takes 30
cents per gallon, the operating profit falls to $1.27. Taxes, at the pump,
include 18 cents due the federal government and, in Illinois 37 cents fuel
tax and at least 15 cents in sales taxes further reduce the profits to 57
cents. Transportation and station operator’s costs including the
lease of the gas station itself may take another 30 cents leaving a 27
cent pretax profit which comports to the industry’s estimate that they
make 9% on sales. All this parsed, what I want to know
is this: How much should the retail price rise when the cost of crude
rises or falls? Assuming there are no frictions in the market (and we
know that environmental regulations are a huge disruptor) should there be,
nevertheless, a logical connection between crude costs and pump prices? Let’s give the oil industry the
benefit of the doubt and let them allocate all price increases to the fuels.
If that fraction of the barrel’s yield is 33.5 gallons, more or less, then
each one dollar rise--or fall--in the price of crude should translate into a
3 cent change in costs. In other words, if a barrel of oil rises from
$60 to $70, crude oil’s cost component should rise to $1.73 from the $1.43
we calculated earlier. Over the last month, Illinois pump
prices have risen about 40 cents, from $3.19 in late March to $3.59 now.
If all other things remained stable, that would mean oil prices had risen
about $13.33 in the period that reflects petroleum’s resident time in the
system. I cannot find a change of that magnitude in the last several
months. Another notion is that oil companies raise prices promiscuously and
lower them judiciously so there is always a bias towards pump prices that
are higher than crude costs would dictate. This makes a logical connection
even more elusive with this data. My first job as a 16 year old was at
Bud Hernett’s Texaco station on Oakland Avenue in suburban Milwaukee.
I distinctly remember gas wars with the station across the street; if those
guys lowered their price we did, too. We were free to lower the price
a nickel to 24.9 cents from the standard price of 29.9 cents. If it
went lower, we had to call Texaco for price support. They always granted it,
one time driving the price down to 18.9 cents. So, even with the
up-to-date information the government publishes and the evident conclusions
that result, I am unwilling jettison that lesson from childhood and to
believe that this commodity market is no longer driven by the fundamental
laws of supply and demand. Moreover, I cannot believe that the
managers of the oil companies are not still compelled by greed and that they
do understand that a slightly lower price would grab inordinate market
share--and profits. The most logical answer is that the world’s demand is raising prices and the continuing devaluation of the dollar is coming home in the form of higher prices. But, even if the conspiracy theorists in the Senate could find one, it’s the nature of price fixers to cheat and that means cartels almost always unravel. So Senator Schumer, if you want to investigate something, don’t look for why a merchant prefers higher prices. Instead, support your charges by telling us why the managers of these oil companies are no longer affected by the immutable laws of economics. ©
2007 Ralf Seiffe Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review. Webmaster Contact: Alynn Patzer alynn11111@aol.com
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